Gifting money is a nice thing to do for a friend or family member, but—as the saying goes—no good deed goes unpunished. If you’re not careful, your gift could turn out to be subject to the federal gift tax of up to 40%.
In part one of this series, we covered the annual and lifetime exclusions as well as lifetime exclusion on the first $11.2 million of your estate. We also talked briefly about the Connecticut state gift tax—the only one in the country—and which kinds of gifts are exempt from the tax.
In this second part of the series, we’re going to look at which kinds of gifts are subject to the gift tax, including gifts to minors.
Gifts subject to gift tax
- Checks. In order to keep people from writing out a slew of large checks on their deathbed (in order to avoid estate taxes), the federal gift tax does apply to checks and the gift is considered effective on the date the donor presents the check.
- Loaning amounts of $10,000 or more at an interest rate below the going market rates. In such a case, the gift tax is calculated based on the difference between the interest rate charged and the corresponding federal rate.
- Canceling indebtedness. While this may not immediately seem like a direct gift, for tax purposes it is considered one.
- Adding a joint tenant to real estate. In this case, the gift tax kicks in if and when the new joint tenant has the right (under state law) to sever his interest in the joint tenancy and, as a result, take ownership of half the property. (Whether the joint tenant exercises that right or not is irrelevant. It just has to be in place.)
- Making a payment on debt owed by someone else constitutes a gift to the debtor.
- Gifts of real estate. Any gift of foreign real estate from a U.S. citizen (whether or not the recipient is also a U.S. citizen) is subject to the gift tax for any property value above and beyond the annual gift exclusion. In addition, any gift of U.S. property is subject to the federal gift tax even if both parties are nonresidents. Such nonresidents are given the same $15,000 annual exclusion, and they are also able to exclude property gifts to spouses. They are not, however, granted the $11.2 million lifetime exclusion.
When it comes to giving gifts to minors (children under the age of 18), both direct gifts and gifts made through a custodial account are subject to the federal gift tax, but all the same standard annual and lifetime exclusions apply. In addition, since a parent’s support payments for a minor’s living expenses are considered legal obligation they are not considered gifts and so they are not subject to the gift tax.
If you’re concerned about gift and estate taxes and are thinking about moving assets out of your name, we can help. Give us a call so we can give you some guidance.
This is the second in a three-part series about the gift tax. See part one for more about which kinds of gifts are not subject to the gift tax.