It can fill you with pride and satisfaction to pass on money to a family member or a charitable organization whose mission you support. However, you must follow the proper steps to ensure the gifting is legal and that it doesn’t leave you on the hook for large estate taxes, capital gains taxes, or other charges.
2020 Gifting Limit
In late 2019, the Internal Revenue Service (IRS) announced that individual gifting limits would remain at $15,000 for 2020. This amount has not changed in several years. The limit means that you can give someone else up to $15,000 of your own money without an automatic gift tax trigger. Married couples can donate up to $30,000 without anyone incurring the tax. Further, you can give up to that amount to multiple people without the recipients having to pay tax on it.
The IRS places no limits on certain types of gifting. These include:
- Gifts to your spouse so long as he or she is a citizen of the United States
- Gifts to pay another person’s medical expenses if you pay the service provider directly
- Gifts to any legitimate charity
- Gifts to cover tuition and other education-related expenses of another person if you pay it directly to the school
You can take heart if your gifts to others aren’t exempt from taxation. The IRS has established a lifetime limit of $11.58 million for estate and gift tax exemptions. How this works in practice is that you can apply any amount over $15,000 to your lifetime gifting tax exemption.
Will You or Your Gift Recipient Owe Capital Gains Taxes?
Typically, the IRS doesn’t enforce taxes on cash gifts up to $15,000. That can differ if you give appreciated securities instead of cash. In this instance, you as the donor and the recipient of your gift could end up owing capital gains taxes.
For example, the recipient of your stock could owe taxes if he or she sells it at any point after the one-year mark. He or she may owe state taxes as well. The key to avoiding this tax is to determine how much you spent to purchase the security, including broker fees and commission. You or your recipient would not owe a capital gains tax if the stock sold for less than the original purchase price.
Consider Different Types of Trusts
A legal trust helps you manage your assets when you want to pass on money to family members or reduce your tax burden as much as possible. You don’t have to be wealthy to establish a trust, and it can provide a significant amount of financial protection. Other benefits include having control over the distribution of the money even after you pass away and protecting it from divorce settlements, lawsuits, and creditor claims. Some of the most popular trusts in the United States today include:
- 529 College Savings Plan: This allows you to set aside up to $150,000 to help a child, grandchild, or another family member with higher education expenses without going against your lifetime limit.
- Donor-Advised Fund: This operates like a personal savings account except the beneficiary is a charity. You can put up to three years’ worth of contributions into one year and claim a charitable deduction during the year you plan to itemize deductions.
Some other options include donating up to $15,000 from your Individual Retirement Account (IRA) to charity tax-free, donate a vehicle to charity tax-free, or create a company for your adult children to protect family assets.
These are just some of the many gifting options available to you. To learn more or start your own gifting process, schedule an appointment with Aura Wealth Advisors today.