Couples whose families are generous enough to give them help towards buying their first home are often concerned with what, if any, tax liability may be created. Do they have to pay taxes on the gift? Do their parents or in-laws pay taxes?
The tax laws on gifts can be pretty confusing, says nj.com in an article, “Are taxes owed on gift from in-laws?”
Good news: a gift isn’t income. Consequently, there’s no taxable income to the recipient.
Likewise, some donors ask if gifts to the children, grandchildren, or others are deductible. Same answer: no. Gifts to other people are never deductible. The question probably stems from the fact that a charitable donation (a gift) is often deductible. Nonetheless, donations are only deductible, if you itemize your deductions.
Next, let’s look at the gift tax, which applies to lifetime transfers. The recipient of a lifetime gift won’t owe gift tax. It’s just the donor who’s subject to the gift tax. Even so, most people never have to file a gift tax return because there are exceptions for gifts to a spouse and gifts under the annual exclusion amount. The annual gift exclusion is $15,000 in 2018. This covers most other routine gifts. Every taxpayer can gift up to the annual exclusion amount to an unlimited number of individual recipients with no gift tax consequences.
Therefore, a parent could gift a child $15,000 with no reporting requirements. If the child is married, the parent can make the same gift to the spouse.
If the parent plans to gift more than the annual exclusion amount, then he’ll need to file a gift tax return. Even so, it’s unlikely that he’ll pay any gift tax.
A parent must claim any gift, in excess of the annual exclusion amount, as a reduction against his future estate tax exemption amount as reported on a Form 709 Gift Tax Return. The estate tax is a transfer tax at death and amounts more than the exemption amount are subject to the tax. That noted, such taxable gifts are less of a concern now that the estate tax exemption amount is $11,220,000 per person in 2018.
Before making decisions to give a gift or to receive a gift, it would be prudent to speak with your estate planning attorney. They’ll be able to confirm whether either giver or receiver needs to pay taxes and figure out how the gift works within everyone’s estate plan.
As always, for clients of our firm who have done lockbox planning to protect assets from the nursing home, please contact us before making any gifts.
If you have any questions please visit our website.
Reference: nj.com (December 6, 2017) “Are taxes owed on gift from in-laws?”