Transaction tax

WILLIAMS: Bringing clarity to gift tax | Local News

Many of us have worked extremely hard in life to accumulate a substantial amount of assets to fund our future retirement.

The younger generation is buying houses, attending college, and beginning life in a way their parents had accustomed them to. However, in the words of great songwriter Bob Dylan, “these times are changing” accurately describes the economic environment for Millennials and Gen Z in 2022.

To lighten some of the tax burden of our children and grandchildren, gifts are often given to them. As you know, there are no free lunches in life – even if you paid taxes on the funds when you earned them – and you want to gift funds to your heirs. Each year, the annual exclusion, an amount that the IRS considers exempt from reporting as a taxable donation, is announced. In 2022, the amount that one person can give to another without declaring the donation is $16,000.

If you and your spouse want to help your child’s family buy a new home, while keeping the monthly mortgage payment at a level the child can afford, many resort to cash gifts to the heir. Let’s say the child buys a first home for $250,000 (yes, I know that’s a lot of money for a first home, but re-read the Bob Dylan quote in the first paragraph of this article) and the deposit required is 20% of purchase. the price. Accumulating the $50,000 down payment would take a lot of your heir’s time and savings.

To shorten the time for saving the funds, you simply want to gift the funds to your child and spouse. If the transaction structure is done correctly, your children will be in a house before you can say “direct amortization.” A parent can give each of the children, your daughter and her spouse, $16,000 each or $32,000 in total. We are still short of the deposit amount, but continue to design our donation plan. The other parent can give the same amounts to the daughter and the spouse and – voila – we now have $64,000 available for the down payment of the new residence.

Now the question arises, how do you report these gifts when returning to the IRS? An IRS Form 709 must be filed by April 15 of the year following the transfer of gifts to a donee. However, you are only required to complete this form if your total gifts per donee exceed the annual exclusion amount ($16,000) during the calendar year. In our previous example, you will notice that the parents only gave $16,000 to each of the donees, thereby avoiding the need to file a declaration of gift.

What happens when you donate a total of more than $16,000 to a donee? How much tax is due on this transaction? Good news, again! If you give a donee more than $16,000 in a given calendar year, a gift return is filed, but the excess amount over the $16,000 is offset by your lifetime exclusion of $12.06 million . What I mean is that you have a considerable amount of donations to make before taxation occurs in most cases.

Another strategy we employ with our clients is funding a grandchild’s education. By donating to fund all of the estimated costs of education, the grandparent can offer five years of annual gifts in one year and choose to be pro-rated over the five-year period. For example, Grandpa Bob wants to send Timmy to the University of Oklahoma in 15 years. Bob can donate a total of $80,000 to a fund that will grow and meet Timmy’s educational needs when he reaches college age. Bob will file a Form 709 and pay no gift tax under the previously stated strategy.

Another misconception of the gift is that the donee believes that he must pay tax on the gift. By its definition and its nature, a gift is something given to another person without any consideration being transferred to the donor. Simply put, you can receive a million dollar donation and pay no income tax. Is it a big country or what?!?

To avoid inheritance and gift taxes, as well as reduced income taxes, it is essential that you plan accordingly before transferring your gift. Certain assets contain characteristics that may require special treatment under the Internal Revenue Code. It is essential that you consider the tax implications before making the transaction. A CPA and CERTIFIED FINANCIAL PLANNERTM professional can guide you through the gifting process in conjunction with your overall estate planning desires. Taxes can be part of life, but they don’t have to be the main part of your life.

See you on the jogging track!

Registered securities offered by Cambridge Investment Research, Inc., a broker/dealer, Member FINRA/SIPC. Jimmy J. Williams is an Investment Advisor representing Compass Capital Management, LLC, a Registered Investment Advisor. Cambridge and Compass Capital Management, LLC are not affiliated. 321 S. 3rd, Ste. 4, McAlester, OK 74501. Cambridge does not provide legal and tax advice. Please consult your legal and tax advisor for specific estate and tax planning strategies.