In this post, we cover a variety of issues that may impact you when giving a gift or receiving a gift:

Gifting Rules.  Individuals are allowed to gift money, investments, and other items of value to family, friends and others as they wish.  However, the aggregate value of the gifts given in a year from one individual to another is reportable to the IRS by the giver by filing a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.  This is not an income tax return, but informational only notifying the IRS of your gifts given in a year.  This annual reporting is required in order to document significant gifts over your lifetime as they impact an individual’s estate and their estate tax at time of their death.  However, the IRS provides an annual exclusion amount of $15,000 per year – total gifts per year by one individual to another individual less than this threshold amount are not reportable and do not require the filing of a Form 709.  In fact, you and your spouse are allowed a combined $30,000 exclusion amount annually with regard to gifting to an individual.   A few final items to note with regard to common gift questions we get from clients each tax season.  First, the receiver of the gift does not report the amount received as taxable income on their tax return – a gift received is not taxable income to the receiver.  And second, the giver of the gift is not allowed a tax deduction as they would had they made a charitable gift.

Funding a 529 plan.  Contributing to your child’s 529 plan is a form of gifting.  Therefore, you and your spouse can contribute $30,000 annually into their child’s plan and not report the gift on a Form 709.  Additionally, taxpayers can frontload up to 5 years of 529 plan funding into one year, known as Superfunding a 529 plan.  This strategy allows a married couple to frontload the 529 plan by funding the plan with up to a $150,000 gift in year one.  In this scenario, the taxpayers are allowed to average the gift over a five-year period of time, meeting the $30,000 exclusion threshold for each of the 5 years.  A form 709 is required to be filed by the taxpayers, but primarily to report the averaging of the gift over the five-year period of time without having an impact on their estate.  However, when Superfunding a 529 plan for a child, additional gifts by the parents to their child over the next 4 years would be considered a reportable gift.

Paying tuition directly to the School.  For gift tax purposes, payments made directly to an educational institution for another person’s tuition are not reportable gifts even if the amounts exceed the annual gift exclusion amount.  If grandparents offer to help pay for your child’s education, this strategy is a great way to avoid the gifting trap if the tuition payments are in excess of the annual gift exclusion.  The payment must be made directly to the school and not to you or your kids and the payment can only be for tuition.  The grandparents may consider this payment a gift, but luckily the IRS does not.  Financial gifts used for educational purposes are excluded by the IRS from gifting under the rule, Gift Tax Education Exclusion for Tuition.

Funding an ABLE plan.  Another gifting option with tax benefits is an ABLE account: a tax advantageous plan set up for the benefit of an individual with disabilities.  To be eligible, the individual must have had an age of onset of disability before turning 26 years of age.  The beneficiary of the plan is the account owner.  The maximum allowed funding per year is $15,000 (total allowed to be received by the plan annually) with lifetime caps based upon state laws (ranging from $235,000 – $529,000).  ABLE plans are also allowed to receive rollovers from 529 Plans, within the annual funding limit.  The contributions to the plan are after tax dollars and will grow tax free as long as the distributions are used by the beneficiary for “Qualified Disability Expenses”.  Qualifying expenses include amounts paid for health and wellness, housing, food, maintaining independence, personal care, and medical care among other expenses related to the beneficiary’s disability and for the beneficiary’s benefit.

 Receiving a gift from a nonresident alien.  If an individual receives a gift (or multiple gifts in a calendar year) or a bequest from a nonresident alien or foreign estate and the total value of the gifts or bequest received from that foreign individual or entity exceeds $100,000 in a calendar year, the individual/receiver is required to file Form 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.  This tax return is informational only and no tax or fee is due with the filing of this tax return.

 

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