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How to give money without getting a tax headache: Part 1

By Nathan Vinson, Attorney
English, Lucas, Priest and Owsley, LLP

giftsIt’s a generous time of year.

There are donations making their way to non-profits, and checks being written in lieu of gifts to family members. If you prefer to give money rather than gifts to children, grandchildren or others on your list, there are a few things you need to know before you write that check.

We’ll address just giving to your children in this blog post; we’ll address giving to charities in part two later this month.

The main point: your gift can trigger your obligation to file a gift tax return if you aren’t careful. We’ll walk you through who you can give to, how you can give and how much you can give. Here’s the official information from the IRS.

What is a gift? The IRS defines that as any amount that is given to someone without receiving something in return. This is taxable, unless it falls under one of the following exclusions: it pays for medical or educational expenses, or it is a gift to your spouse. Gifts that are not more than your annual exclusion per person for the year are also not taxed.

What’s the annual exclusion? That’s the threshold you have to cross for your gift to be taxable. Each person receiving a gift can get up to $14,000 in 2016 from a single person. So, if you have five children, each one can receive $14,000 from you without being taxed on it. If you give $15,000 to each of your five children, you’ll need to report $5,000 on a gift tax return. If you and your spouse want to give away property that you own jointly, $28,000 of the value of what you are gifting would not be taxed.

Who pays the taxes on a gift? As mentioned above, the person doing the giving. However, in some cases, the person receiving the gift may be willing to pay you back for the amount you’re being taxed.

How much will I be taxed? It depends on your tax bracket. A professional adviser or tax preparer can help you determine how much to pay.

What’s the best way to give? From a tax perspective, it doesn’t matter how you give money; if you give cash, personal check, cashier’s check, wire transfer or savings bond. All are subject to the same tax laws.

What if I give a gift of property? That’s more complicated, and you need to be sure you’re handling that correctly from a tax perspective. You’ll need to establish the fair market value (“FMV”) of the property you’re giving, which means you need to know what it would bring on the fair market if you sold it. An appraisal is the best way to establish this. The tax value of the property as determined by your local government entity is not the same thing but can suffice to establish FMV in some instances.

A note about handling gifts

For the most part, giving cash to your children isn’t complicated. But you may need assistance if you’re doing something particularly complicated or giving your child an expensive piece of real estate. If you’re giving part ownership, and not the whole thing, that’s even more complicated. While you may think hiring a professional advisor is overdoing it for giving your children a house, it’s not. Incurring surprise tax liability is not what anyone has in mind for a gift.

If you’d like professional tax advice, contact me, attorney Nathan Vinson, at nvinson@elpolaw.com or (270) 781-6500. I’ll be glad to talk to you.

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