Now that we have gotten the limits out of the way, let’s look at a few examples:

We have a single aunt who would like to gift $5,000 to each of her four nieces, (this is the only gift to them she will make this year), since the amount given to each niece is under the annual exclusion of $14,000, there will be no need to report the gift or pay gift taxes.

Let’s change the scenario and increase the gift to each niece to $20,000 this year. Now the amount above the annual exclusion given to any one individual has to be reported and will count toward the aunt’s lifetime exclusion ($5.45 million). The aunt would report the extra $6,000 per niece and would subtract $24,000 from her lifetime exclusion (the cumulative total will be reported on her next required gift tax return, IRS Form 709).

To avoid this reporting, our example aunt could gift $14,000, the annual exclusion, this year to each niece and then, come January 1st, gift the other $6,000 to them. This would allow the aunt to spread the gifts over two tax years and not use any of her lifetime exclusion; she would also avoid the requirement to file IRS Form 709. The checks given to the nieces this year would need to be cashed by December 31st to be a completed gift and count toward this year’s annual exclusion.

What about the aunt gifting appreciated securities instead of cash to the nieces? The annual exclusion is still $14,000, be the gift cash or securities (i.e., stocks, mutual funds, ETFs). The idea here is the shifting of income from the aunt’s higher tax bracket to the nieces’ lower tax brackets. When the aunt gifts assets to the nieces, she transfers her cost basis and holding period to them as well. When the nieces sell the securities they could be paying as low as 0% capital gains compared to the aunt’s who could be as high as 20%. It is important to understand and be aware of the “kiddie tax” rules that limit the amount of unearned income for children under 19 and for college students under 24.

Let’s now look at gifting for the future. Staying with our aunt and 4 nieces example, our aunt would like to help jump start the nieces’ savings for their future by funding Roth IRAs for them. There is no minimum age requirement to open a Roth IRA. The only requirement is the individuals (the nieces in our case) must have earned income. Earned income includes all taxable income and wages from working. If the nieces have earned income, the aunt could contribute/gift to a Roth IRA for them up to the lesser of $5,500 (IRS maximum for those under age 50) or the total of their earned income. Here’s the power of that gift: let’s say the aunt or the niece puts $5,000 a year into a Roth IRA for the next 50 years until they are 65 years old, and the investments get a 5% annual return. At age 65, they would have more than one million dollars – 4 times what was invested. That’s the power of compounding (money + time = worth). This would be a great way to get the nieces involved in investing and understanding the importance of saving early for their futures.

As this year comes to a close, one should look into the power of the gift. One closing note: gifts made directly to providers for medical, dental, and tuition expenses for anyone do not count toward the annual and lifetime exclusions.

Robert Palmer, CFP®
Senior Vice President
Wealth Management Advisor
View Roberts’s Profile

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