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‘Tis the Season

Dana Silverthorne

Tax Manager

 

‘Tis the Season

As 2017 winds down, the season of giving is upon us.  Before donating to your favorite charity or bestowing a generous gift to a family member, brush up on some tax rules that may affect you.

What’s the difference between a charitable gift and a gift that qualifies for the annual gift tax exclusion?

As a general rule, in order to be tax-deductible, a charitable gift must be made to a qualified charitable organization.  If you aren’t sure whether a particular organization is qualified, you may search online using the IRS website to check its exemption status.  Charitable gifts may be in the form of money or property.  When donating property other than cash to a qualified organization, you can generally deduct up to the Fair Market Value of the property.  A charitable gift/contribution is typically deductible as an itemized deduction; therefore, you’ll only receive a tax-benefit if you itemize on your tax return.  Further, you may not always get to deduct the full amount of your charitable gifts, as certain limitations apply.  Limitations based on 1.) type of property donated and 2.) type of charitable organization come into play even after considering the Adjusted Gross Income (AGI) limitation.  Generally, the AGI limitation restricts your charitable contribution deduction to 50% of your AGI; however, amounts contributed in excess of the AGI limitation can be carried forward for up to 5 years.  It is important to retain receipts for all donations, including cash donations, and maintain appropriate records of value for any non-cash items you donate.  All charitable donations must be made on or before the close of the tax year to get a deduction on that year’s return.

The annual gift tax exclusion can be a bit more complicated and is commonly utilized as an estate tax planning tool for intra-family wealth transfers; however, the gift tax exclusion is not limited to just family members, it can be used for gifts to any individual.  Unlike charitable contributions, gifts made to persons other than charitable organizations are not deductible to the donor, but may be exempted from the gift tax if they meet or fall below the annual exclusion amount.  For 2017, the annual exclusion is $14,000; anything over $14,000 is subject to the gift tax, but the tax assessed on the excess will first eat into your lifetime estate tax exemption before tax is actually payable (estate tax exemption is discussed later).  The annual exclusion has remained at $14,000 since 2013, but is will be adjusted to $15,000 for 2018.  The donor is typically required to pay any gift tax liability, but under special arrangements the donee may request to pay the tax.  Recipients of taxable and/or excludable gifts do not need to claim the amounts as reportable income on their tax returns, regardless of the amount.

A single individual is entitled to the annual exclusion on a per donee basis; in other words, you can gift multiple persons $14,000 each without exceeding the annual exclusion.  Further, married individuals are each entitled to their own annual exclusions and can therefore gift the same person $14,000 each for a total of $28,000.  In some cases, parents may want to gift their son or daughter a larger amount of money, usually to avoid estate taxes or to help their child with the cost of a down payment for a house.  In that case, the limit from one couple to another couple is $56,000 annually, which is computed as follows:  $14,000 annual exclusion x 2 donors x 2 donees.  Here’s how that breaks down:  a father gifts his son $14,000 and his son’s wife $14,000 and then the mother opts to gift her son $14,000 and her daughter-in-law $14,000 for a total transfer from one couple to another in the amount of $56,000.  The annual gift exclusion does not count toward the lifetime estate tax exemption, which is $5.49 million for 2017; married couples each get a lifetime gift exemption which brings their total to almost $11 million.  The estate tax exclusion is utilized for any money and/or property that you leave to your heirs, as well as any taxable gifts you bequeath while alive.

Certain gifts are excluded from the gift tax completely; these include 1.) gifts made to your spouse and 2.) gifts for education, medical, and dental expenses, if paid directly to the educational institution or provider.  The “Marital Deduction” allows married couples to transfer an unlimited amount of money and/or property between the two spouses; therefore, the gift exclusion is unlimited for inter-spousal gifts.  Note that the unlimited marital deduction is only available to U.S. citizens, as non-U.S. citizens are subject to limitations.  As mentioned previously, gifts for education, medical, and dental expenses don’t count towards any of the limitations if paid directly to the provider/institution.  If, for example, you give your daughter $20,000 to pay for college tuition, the $6,000 over the $14,000 gift limit/exclusion would be subject to gift tax.  On the other hand, if you send the $20,000 directly to the school, none of the gift would be subject to gift tax.  The educational exemption only applies to tuition; it does not count toward room, board, meals, books, etc.  However, you may gift your child up to $14,000 annually to help cover those excluded items.

As tax laws are ever-changing and complex, we recommend you speak to your CPA before making any significant financial decisions.  As always, we are available to answer any additional questions you may have regarding your specific tax situation.

 


PKC Kuebler, APC is a full-service public accounting firm registered and licensed to practice as an accountancy corporation by the California Board of Accountancy. The information provided is intended for general tax and accounting needs. Articles are written for informational purposes only and should not be seen as any kind of advice. Content is accurate and true to the best of our knowledge, however, there may be omissions, errors or mistakes and it is advised you contact your CPA before taking any financial action. The opinions expressed in our articles do not reflect the opinions of any organizations in which we are affiliated with.

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