The annual Gift Tax exclusion for 2014 and 2015 is $14,000.00 per person per year. This means that you can give $14,000.00 per year to your children and relatives and unrelated persons, and you do not have to file a Gift Tax Return.
Because the Gift Tax is tied to the Estate Tax, any gifts you give during your life above the $14,000.00 annual exclusion amount will be “charged” against your Unified Credit for Estate Taxes. So if you don’t pay the Gift Tax then the gift will be considered part of your estate for estate tax purposes.
The Unified Credit in 2014 is equal to the Estate Tax on $5,000,000.00. The Maryland Estate Tax Credit in 2014 is equivalent to $1,000,000.00, but that Credit amount is phasing up to match the Federal amount over the next 5 years
The significance of these figures in relation to specific gift amounts is as follows. When you write a gift check for $14,000.00 there is no dispute about the value of the cash. There is no gift tax and no dispute about the value of the gift. When you write a gift check for $30,000.00, $14,000.00 is excluded from gift tax, but $16,000.00 will be subject to Gift Tax during your life or “charged” against your estate tax credit if and when you die.
The difference between a check for cash and a gift of property is that gifts of property or stock or business interests are subject to audit and appraisal and can be challenged by the IRS and the Comptroller. However, if you make gifts of real estate or stock to your children and file a Gift Tax Return declaring the value of the gift, the IRS has a limited period to time to challenge the valuation in your Gift Tax Return.
And your Gift Tax Return can elect to “charge” the value of the gift against your Unified Credit for Estate Taxes.This means that if the real estate or stock increases greatly in value during your life the IRS cannot try to include the “date of death” value of that gifted property in your estate for estate tax at the 50% rate.
The gifted property’s value in the hands of your gift recipients will be subject to capital gains tax on the increase in value, but capital gains rates have been less than estate tax rates, although capital gains tax rates are creeping up from 15% to 28% depending upon the type of property sold.
So if you make gifts of property and not cash, make sure you consult with your attorney to determine the best way to value the property and file a Gift Tax Return.
Also when making gifts for tax planning purposes, be very clear and specific about transfer and delivery of the gift, and document the transfer clearly to complete the gift.
Posted in: HBD Law News