By George Paulsen, Hood & Strong Tax and Advisory Partner
In the last few years Hood & Strong has been filing a lot of gift tax returns for gifts to family and charity. Looming tax law changes are causing clients to be more generous, and we want to remind everyone that there are some very good reasons to make these gifts now rather than later.
Given all of the recent news about the golden coach turning back into a pumpkin when the gift tax laws revert to pre-TCJA (Tax Cuts and Jobs Act) law, we are advising wealthier clients to transfer up to $12 million to their heirs before the law changes. If you don’t take advantage of this tax exemption before the law changes, the exemption amount drops in half by the end of 2025, and the opportunity is lost.
Here is a snapshot of some of the benefits and pitfalls regarding making gifts:
- Current law allows up to $17,000 in individual gifts (cash or appraised property) with no reporting requirements to deal with. Technically, if you write a $17,000 check to a grandchild and then give them birthday or holiday presents worth $100 each, you will have exceeded the limit and are required to file tax form 709 and report payments against a future generation skipping tax, as well as disclose the recipient and the nature of the gift beyond $17,000. So if you expect to make gifts that exceed the limit, please call us for guidance. We can share the tax nuances of giving money or appreciated property to family or charitable organizations, as gifts to nonprofits are also required to be reported on the tax form 709.
- A special IRS law allows you to set up a 529 Education Plan to benefit a child or grandchild and front load five years of gifts to get the money working faster. This can be a good strategy for families who want to take advantage of the current tax exemptions and get ahead of educational expenses.
- When gifting property such as a car or furniture worth more than $5,000 to a 501(c)3 charitable organization, you need to provide a signed tax form from the organization and an appraiser thanking you for the gift and stating the appraised value. The same is true for property gifts to individuals, except only an appraisal is required to substantiate the value. However, if the property you gift has appreciated in value – such as a piece of real estate – your cost basis transfers to the recipient. The charity won’t care as it doesn’t pay tax, but your children may because they’ll get a tax bill if they choose to sell it.
- There are times when a gift is not taxable and there is no limit on the amount. For example, payment for medical or educational expenses made directly to the institution for the benefit of a patient or student is not a reportable gift. However, you cannot give the money to the individual or someone else to make the payment. Per the IRS, the gift must go directly from you to the school, hospital or care facility.
These items are just the tip of the iceberg when it comes to the tax implications of giving away your money or property. If you are planning to gift $5,000 or more to a charity or more than $17,000 to an individual, please contact us so we can help you choose the best path. Once you act, it can’t be undone.
As one of my clients recently put it, “I love to make gifts to my family and causes I care about while I am still around. I get smiles and thanks from family and recognition from the charity in appreciation.” This tax season, consider if giving away your money or stuff makes sense for you. We’re here to help.
