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Military Finances 401: Understanding Gift Taxes Thumbnail

Military Finances 401: Understanding Gift Taxes

Taxes Estate Planning

I’ve been teaching a finance course at ETAPs for over 14 years. One of the questions I almost always get is about gifts and gift taxes. It’s not surprising. Gift taxes are complicated. Let’s see if we can clear some of the rules up and look at some situations where gifting might or might not be beneficial.

Which Gifts are Subject to Gift Tax?

Gifts given to anyone other than you spouse can be subject to taxation. You have an unlimited lifetime exclusion for gifts given to a spouse (as long as he or she is a US resident). Anyone else and the gift could be subject gift taxes.

Gifts include cash, securities and tangible property.

Is There an Amount that I can Gift and Avoid Taxation?

Yes. First of all, there is an annual exclusion. As of this writing (2024) the annual exclusion is $18,000 per donor per donee. So, if you’re married you and your spouse can gift the annual limit to each of your children and you don’t have to file a gift tax return. It is important to understand that for you to be eligible for the annual exclusion, the gift must be a gift of a present interest. In other words, the donee must have immediate access to the gift. You can’t put it in a trust for future use.

Beyond the annual exclusion there is a lifetime exclusion as well. In 2024 the lifetime limit is $13.61M per person. This is in addition to the annual exclusion. In other words, if you gift more than the annual exclusion amount to an individual in a given year, you will need to file a gift tax return but you want pay gift tax until you total “unexcluded” gifts exceed the lifetime limit (currently $13.61M). If the Tax Cuts and Jobs Act (TCJA) sunsets as planned, the lifetime exclusion will fall to about ½ its current level.

Are There Any Tax Considerations I Should Be Aware of if I Gift Assets Other Than Cash?

Gift taxes aren’t the only tax you need to consider if you gift something other than cash. Actually, you’re considering the taxes of the person who receives the gift. When the recipient sells the asset, he or she will have a gain or a loss. That gain or loss will be calculated based on your basis (normally what you paid for the asset), not the value on the date you gifted it. Conversely, if you hold the asset until death, the recipient will get a step-up in basis to the Fair Market Value (FMV) on the date of death.

What Planning Opportunities are there with Gifting Assets?

You can use gifting to control taxes for the family unit. Let’s say you have some assets you want to sell to pay for an expense like college for Junior. If you sell it, you’ll pay capital gains taxes based on your income. If you gift it to Junior and he sells it, you might be able to capture the capital gains at a lower rate (even as low as 0%). There are limitations and make sure you understand the Kiddie Tax rules. But you might be able to save a few hundred dollars.

Gifting can also be used to reduce estate taxes. While the lifetime exclusion is for combined gifting and inheritances, by gifting assets to either an individual or a trust you can transfer future growth out of your estate and reduce or eliminate estate taxes on that growth.

Military Finances are Different

While both civilians and military members are subject to the same rules when it comes to gifting assets, that isn’t always the case. Active and Retired Senior Military Officers and NCOs have benefits and opportunities not available to their civilian counterparts. That’s why we think you should work with a financial advisor that works with your military issues each and every day. If you’d like to find out how we do that, use the button below to schedule a free initial consultation.

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