Gifting Assets

Many parents think about helping out their children with gifts of cash or other assets, especially when the parents are financially comfortable and their children may be struggling a bit with debt or college expenses for their children. However, many do not understand the tax consequences of gifting and therefore worry (usually unnecessarily) or choose not to gift rather than run afoul of any tax rules.

Gifting can be a loving, helpful gesture for younger generations. It can also be useful to reduce your estate for federal estate tax purposes, by shifting assets to a younger generation. However, you must understand the tax rules for gifting, estate and income tax purposes.

First of all, gifts are never income taxable to the recipient. The money or asset received is a GIFT, not income. Therefore, gifts are not includible on the recipient's income tax return. Additionally, gifts are only rarely federally gift taxable. An individual is allowed to gift up to $15,000 per person per year and not pay any federal gift taxes. A gift tax return (IRS form 709) is not required either. Most people have heard about this rule, and think that gifts are limited to $15,000 (in 2018; This amount may be adjusted from time to time) per person per year.

However, that is not true either. There is a federal gift tax rule that allows gifts above and beyond the $15,000 per person per year amount without paying any federal gift taxes. This is called the Applicable Exclusion Amount (in 2018, this amount is $11.8 million and subject to change), and can be used one time or can be used over many years. The difference between gifting only $15,000 and gifting more than that is that for the excess, a Form 709 (Gift Tax Return) must be filed by the donor of the gift. The excess amount is reported, and part (or all) of the exemption is applied to the gift to reduce any taxes to zero. Only when gifts in excess of the exclusion (in 2018, $11.8 million) have been made do any federal gift taxes accrue (therefore it only affects a small percentage of people). The recipient of the gift never pays any gift tax.

The use of the exemption does, however, have an impact on federal estate taxes at death. If the exemption is used to make gifts during lifetime, then only the balance of the exemption remaining is available at death to exempt assets from federal estate taxes. The federal gift tax and federal estate taxes are interrelated in this way. The good news is that with the federal estate tax exemption currently at $11.8 million in 2018, most people don't have to worry about federal gift or estate taxes anyway.

Ohio does not have a gift tax, so there is no filing requirement or taxes due at any time in Ohio. Other states may have some form of gift tax, so if you plan on moving and making gifts while living in another state, you should check out the laws in your new state of residence.