Around the holidays, we’ll get asked many questions about gifting money to family members. Being generous is a good thing, but you’ll want to make sure you know the tax impact of gifting.
We have a unified tax system for gift taxes and estate taxes. The federal estate tax exclusion amount for an individual taxpayer passing away in 2018 is $11,180,000. This means that if an estate is worth less than this amount, the decedent will not be subject to estate taxes.
This exclusion amount also includes any gifts the decedent gave during their life that was above the annual exclusion for gifts ($15,000 for 2018). This means that only if a taxpayer gives away more than $15,000 in 2018 to any one individual, then the amount over $15,000 (2018) will be subtracted from the $11,180,000 estate tax exclusion. This is done by filing a form 709 – Gift Tax Return.
For an example, if a taxpayer dies in 2018 with a $7,000,000 estate and made gifts over his lifetime of $2,000,000 (as reported on form 709, gift tax return), the decedent’s estate will not be subject to estate taxes. No taxes were paid when the gift tax returns were filed, and none are due at death on the $2,000,000 in previous gifts.
In 2018, a taxpayer can gift $15,000 per individual to anyone they want without filing a gift tax return. If you give over $15,000 to an individual in a calendar year, it does not mean that gift tax is due for that year. However, a gift tax return (Form 709) will need to be completed so the amount over $15,000 is removed from your overall exclusion amount.
The gift tax return is filed by the donor, not the recipient. For married tax payers, they can elect to split gifts so they could give $30,000 to their daughter and elect to split the gift to $15,000 each so that a gift tax return is not required.
Some individuals or couples may wish to make loans to a family member, often for the down payment on a house. There may be tax implications to loaning money to a family member.
The IRS generally treats loans as gifts unless it is likely that the loan can and will be repaid, the lender has a promissory note with the loan terms stated, and the lender charges an interest rate using an amount equal to or greater than the Applicable Federal Rate (AFR – published monthly by the IRS).
If the lender makes the loan at a rate below market (or charges no interest), the lender is subject to imputed interest. The lender will have to calculate interest and pay taxes on this ‘phantom’ income. For this reason, the lender should try to collect at least the interest charge every year.
The lending family member must include the interest income in their taxable income, whether it is received or not. If the borrower does not pay the interest in a given year, the amount of interest is treated as a gift to the borrower, so a gift tax return may be required to be filed by the lender/donor.
If the loan is uncertainly or unlikely to be repaid, the donor should file a gift tax return if the amount is over $15,000.
Because the lender is required to pay taxes on interest income whether received or not, generous givers should not make an interest free loan to friends or family. By charging a rate that at least equals the AFR or more and collecting the interest annually, you will have the income to pay the taxes on the interest income and not have to be concerned with filing a gift tax return.
There are exceptions to the loan rules. If the total loan is less than $10,000 and is not used for investment in stocks or bond, the transaction is not reportable. If the total is less than $100,000 and the borrower has investment income less than $1000, the lender would not be subject to the rules for charging interest.
Some well-intentioned borrowers may be unable to pay the lender back. The lender can take a deduction on his or her taxes for non-business bad debt. The lender must prove it was a legitimate loan and prove that he or she made attempts to collect the debt. The taxpayer should obtain a statement from the debtor explaining that they can’t pay. The write-off is reported as a short-term capital loss.
So, if you plan on gifting money this holiday season, you can gift up to $15,000 per individual and no action needs to be taken for tax purposes. If the amount is over that gift tax exclusion amount, you will need to file a gift tax return (Form 709), but no taxes will be assessed. If loaning someone money is on the horizon, be familiar with the tax implications of that loan depending on the type and amount of the loan, along with the interest rate you charge.
Lisa Lawhorn is a Tax Advisor at Wealthquest, a Cincinnati-based financial planning and wealth management firm that offers a full range of financial services under one roof, for one simple fee.