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I’m attorney Paul Bernstein of the Bernstein Law Group. Clients frequently tell us, we understand that we can give away up to $15,000 to each of our kids, but after that, there’d be a tax, and we can’t give anything more. That’s actually incorrect, at least for most people.
Questions about the gift tax
There’s a lot of confusion around something known as the gift tax. So what is the gift tax? The gift tax was enacted once it was discovered that there was a huge loophole with the estate tax. So the estate tax or death tax is a tax levied on certain people. If they pass away and they have too much in their estate, there’ll be a tax.
The federal government has an estate tax. The Commonwealth of Massachusetts has its own estate tax. So the loophole was that wealthy people that would be subject to an estate tax on their death bed weren’t surrounded by family members. Instead, they were surrounded by their professional advisors, their attorney like myself, their CPA, and their financial advisors.
And they’d be signing all sorts of paperwork, transferring their real estate, their business holdings, their investment accounts, their cash, and everything over to the family. Then they’d die a few hours later, penniless. So that was the loophole. There was no estate tax due because it was all given away during the person’s lifetime.
The gift tax to close the loophole
To close that loophole, the federal government enacted a gift tax. By the way, Massachusetts does not have a gift tax. It only has an estate tax. So we’re only dealing with the federal government when dealing with gift taxes.
What you can give to family members
The gift tax is currently combined with the estate tax. And it says that you can give or allow family members to inherit a certain amount of your wealth. And that amount is $11.7 million for this year, 2021.
The $15,000 amount
In addition, you can gift $15,000 per person per year as well. Many clients have heard that and they say, well, I can give to each of my children $15,000. And those that are married and are astute realize they can double that. Each spouse can give 15,000 per child. So that’s $30,000. That’s the annual amount you can give every year per person.
And then the next year you can do it all again if you so choose. So that’s the annual exclusion amount. It’s a use it or lose tax break. If you don’t give it away this year, you can’t make up for it the next year. It’s $15,000 per person per year.
What if someone gave away too much?
But let’s say a client came in, which has happened, and said they gave away $115,000. Do they owe a tax because it’s more than $15,000? Probably not. The first $15,000 applies toward the annual gift exclusion, but now we have $100,000 remaining of that gift. No gift tax though. What happens is that we have that $11.7 million federal credit of which we can burn up or use up $100,000.
Because they gave away $100,000 over the 15,000 annual amount, the $11.7 million lifetime estate exclusion has now been reduced by $100,000. They have just $11.6 million left in their exclusion amount to gift in the future or at their death. So they can give inheritances up to that amount without any tax at all.
It’s a non-factor for most people
For most people, of course, that’s just a non-factor. There won’t be a gift tax because most people don’t have anywhere near the $11.7 million threshold amount. Now I had said earlier for most people, and the reason I said for most people there won’t be a tax is because if they’ve already used up and given away their full exclusion amount, that $11.7 million, that excess $100,000 would be taxed.
But that’s a rare circumstance. Most people don’t have that size of estate, or even if they do, they haven’t given away their full $11.7 million amount. So you can give more than $15,000 per person per year. It’ll just reduce that $11.7 million state exclusion by the excess amount.
I hope you found this information helpful. If you have any other questions or are not sure what to do next, feel free to reach out to us.