Estate planning is critical to ensuring your legacy and wishes are respected. Choosing the right estate planning attorney is essential to this process. This article provides tips for selecting an attorney to serve your needs best and guide you through crafting a comprehensive estate plan.
A recent nj.com recent post asks, “Will the IRS know if I gift money to my grandchildren?” The article explains that federal and state tax agencies do not have any direct way of knowing how much is being gifted. They rely on taxpayers self-reporting gifts. It’s the honor system.
However, the tax authorities may discover this when you or the recipient are audited, by matching transactions reported for certain assets, or because banks are required to report cash transfers in excess of $10,000. Because it’s pretty simple to avoid paying tax, it doesn’t seem worth the risk of getting caught trying to skirt the rules. Understanding the tax is the best way to avoid issues.
The IRS stipulates that a gift is “the transfer of property by one individual to another, while receiving nothing, or less than full value, in return.” It is never taxable to the recipient, so only the person making the transfer has to consider the tax.
The amount you can give will not be subject to transfer tax, if the gift amounts are less than the annual and lifetime exemptions. The annual gift exemption is currently $15,000 per recipient, which means that you can give up to $15,000 each year to an unlimited number of people with no reporting requirement at all.
You’re supposed to complete a U.S. Gift Tax Return (IRS Form 709) if you exceed the exemption, but don’t panic. Although you are required to file a gift tax return, it is highly unlikely any gift tax will be due.
That’s because gifts in excess of the annual exemption offset your lifetime exemption, before any gift tax is due.
The IRS can impose penalties if you they discover that you failed to file a tax return, even if no tax was due. Also note that the gift tax is integrated with the estate tax, which applies to amounts transferred upon your death in excess of your remaining lifetime exemption.
If you’re planning on giving money away to help pay another’s college costs or medical expenses, make the payment directly to the educational or healthcare institution, because that payment isn’t considered a tax problem.
Ask your estate planning lawyer about any transfer and inheritance taxes.
Reference: nj.com (October 1, 2019) “Will the IRS know if I gift money to my grandchildren?”