In California with our high real estate prices buying a home is often a joint family venture. How can you help your children and stay clear of any potential gift taxes? It may be easier than you think to avoid any gift taxes. In 2013 and going forward if you give a gift over $14,000 to any one individual that gift is subject to the federal gift tax requiring the giver (you) to file form 709 with their taxes. The recipient does not pay taxes, although in certain instances it can be arranged for the recipient to pay the tax. Those details are beyond the scope of this article, as we’re focusing on avoiding the tax altogether.
Trick One: The annual exclusion applies to individuals
As in the exclusion applies individually to the giver and the recipient. For example, you give $14,000 to your child, your spouse gives $14,000 to your same child for a total gift of $28,000. The total $28,000 qualifies under the exclusion. Let’s say your child is married – you and your spouse and gift to your child’s spouse another $28,000 (another $14,000 each), for a total gift that year of $56,000! All completely under the annual tax exclusion. Note that if you’re working to qualify for a loan, you’ll want to talk to your lender or mortgage broker to make sure everything will work together. If your child has a credit score of 740 or more and has a low debt ratio the full amount can be a gift. Other options would be making sure the gift is “seasoned” in the bank account for enough time that the lender would not consider it a gift. Trap: if you just write one big check for $56,000 to one individual your gift won’t qualify. It is possible with some extra paperwork from your tax preparer to “split” your gift between you and your spouse after the fact, but you can’t split the recipient after the fact!
Trick Two: Pay medical or tuition expenses directly
Any gift to an individual is subject to the gift taxes, but if you pay medical or tuition expenses directly to the medical or educational institution directly on someone else’s behalf, there is no tax liability. So perhaps you want to pay for your child’s last year of college directly so they can save the money they would have otherwise spend on tuition for a down payment on a house. Note that there isn’t a limit on this exemption. Trap: Don’t write a check to the beneficiary and put a memo “for college” and expect to qualify! The check has to go directly to the provider.
Trick Three: Take advantage of your lifetime exclusion (the “unified credit”)
Besides the annual exclusion amount you have a “unified credit” which covers any gifts subject to tax and your estate tax credit. Unlike the “annual exclusion” which applies to each calendar year, any “unified credit” you claim on your taxes reduces the credit you have for future years. For 2013 the unified credit amount is $2,045,800 (exempting $5,120,000 from tax). Trap: Potentially you’ll want to pay the gift tax now and keep your full credit for your estate tax. If you have a larger estate (approaching $5 million or more) you should consult with your tax professional and estate planner. Giving is always a blessing, and hopefully these few tips will keep giving from being taxing!