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Military Finances 101: Understanding Gifts and Gift Taxes

Estate Planning Taxes

Military Officers Ask About Gifts All the Time

I have to think that gift taxes are one of the biggest sources of confusion for most Americans, including military officers.  I get questions about them at virtually every ETAP presentation that I do. Understanding gifts and gift taxes is a little complicated, but they can be understood.

It is Unlikely You'll Ever Pay Gift Taxes

Let's start with one misconception.  At the Federal level, the person who receives a gift is never subject to taxation.  To my knowledge this is also the case at the State level, in all States.  But the person who makes the gift is subject to taxation at the Federal level and in some States.

As far as transfer taxes (gift and estate tax) go it is unlikely you'll ever actually pay any money to the Feds. That is because you have a lifetime Unified Credit. Your Unified Credit, as of this writing, offsets the taxes on more than $11,000,000 of taxable transfers via gifts or your estate. Most of us won't have to worry about this, but it should be noted this is for Federal transfer taxes, not State transfer taxes. You may have transfer tax issues at the State level.  You may not owe taxes, but you're not out of the woods yet.  If you made a taxable gift, you must file a Gift Tax Return (IRS Form 709) even if you owe no tax. This is to account for using up your Unified Credit. But just because you made a gift, it doesn't mean you made a taxable gift.

There is an Annual Exclusion

If your gift is below the annual exclusion limit ($15,000 in 2018), the gift is not taxable and you do not have to file a Gift Tax Return. The annual exclusion is for each person you give a gift to. If you have two children, you could gift the annual exclusion amount to each of them for a total of twice the annual exclusion limit ($30,000 in 2018). If you are married, your spouse could make the same gifts with the same results.

There is a little bit more to it. The gift must be a gift of a "present interest" which means that whoever receives the gift can use it however he or she wants, right now. If the gift goes to a trust, as an example, and isn't available to the beneficiary for several years it is not a gift of a present interest and the annual exclusion does not apply. There are ways to structure the trust to avoid this issue, but you'll want to consult with an attorney that specializes in this area of the law before you try it.

Two Ways to Make Unlimited Gifts

If you pay for education or medical expenses the gift limits do not apply. But the payments must be made directly to the educational institution or the medical facility. If you give money to someone directly and they pay for the expenses, the annual exclusion applies.

Gifting Opens a Lot of Doors

Once you understand the gift tax rules, you can begin to see ways that you might be able to shift assets and future income to a family member, as an example, and reduce the family's overall tax burden. If you'd like to discuss some options, give us a call.


If you found this article useful, you might also like the following articles

What Military Officers Need to know About TSP and Estate Planning


Military Landlord? You have Estate planning Issues


Military Retirement, VA Disability and your taxes




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