Let’s answer the second part of this question first: It’s a provisional No for most of my clients. Currently, there is a $14,000 per year gift tax limit. The tax code allows a person to give an unlimited number of $14,000 gifts in any given year to any number of individuals. You just can’t give more than $14,000 to any one person is any one year without filling out a gift tax form.

Myth Versus Reality

A lot of people have misconceptions about the gift tax that I believe were caused by a throwback to some old laws that we had in North Carolina, where if you exceeded the gift tax limit, you would owe money out-of-pocket.

The way it really works at the federal level is, let’s say, you gave a $15,000 to your favorite nephew. Now you need to fill out a gift tax form naming the nephew who you gave the gift to, as well as the fact that it was a $1,000 above the $14,000 limit. The $1,000 is reported to the IRS, which counts it against your estate tax credits. So, if an estate tax limit was, for instance, $5 million – there’s now only $4, 999,000 that you can give estate tax free upon death. The additional $1,000 you gave to your favorite nephew eats away at that exemption.

So unless you are actually giving away more than the $5 million of that bank of tax credit that you have at the IRS, you don’t need to pay any out-of-pocket. It does become an issue if you simply gave away the money and did not report it. Therefore, if you want to give out more than $14,000 to any non-spouse in one year, you really need to make sure that you file that tax form for that documentation.

Unintended Consequences of Poor Planning

One example that people don’t think of as a gift is putting another person’s name on your investments. If you have a $250,000 mutual fund and say “I’m just going to put my son’s name on my account.” That can be looked upon as your giving your son $125,000. That “unreported gift” could lead to IRS issues down the road. You need to make sure that you are not unintentionally gifting people your assets. We’ve had people come in saying that they just put their daughter on the deed of the house or have their son on this or that account. They were unaware that half their value was now considered unreported gifts in the eyes of the IRS. As a result of poor planning, they needed to catch up with the forms to be filed on them and may have had to pay penalties for late filings.

Should I be Worried?

So, is the gift tax something you should be worried about? Not really. As long as you are doing it with the knowledge of what is entailed when giving that gift and what filings have to be done. It’s just a matter of doing it correctly.

If you have any additional questions on the gift tax or other estate planning issues, please give our office a call. We have a friendly and caring staff here to help.