If you’ve spent any time at all on the internet over the past few years you will recognize this blog title as a little bit of click-bait. We aren’t going to take you to some shady corner of the internet and attempt to sell you homeopathic medicine though. We really are going to share one simple estate planning trick for avoiding taxes. That trick is gifting.
You have probably noticed that when someone gives you a gift, you are not taxed for it. Unless you have given someone a very large gift, you have probably never been taxed for gifts you have given either. The reason for this is simple, the government doesn’t want to discourage people from giving one another gifts, or burden itself with keeping track of everyone’s Christmas presents to one another.
Taken to its extreme, tax-free gift giving would create a major tax loophole. People could simply gift their estate to the people they want to inherit it on their death beds, and Uncle Sam would be cut out of the deal. To prevent this from happening, the federal government has placed a $14,000 per person, per recipient, per year cap on tax-free gifting.
This means you can give as many people as you like $14,000 each this year and not pay a cent in taxes on those transfers. If you are married, your spouse can do the same, doubling the amount you are able to transfer to a single person to $28,000. If you and your spouse consistently make the maximum tax-free gifts each year, you can transfer a lot of money around without paying taxes on it.
If you are uncomfortable gifting cash to certain people you want to benefit, your underage grandchildren for example, you can set up irrevocable trusts naming the person you want to ultimately receive the money as beneficiary.
If you gift directly to a beneficiary’s educational intuition or medial provider you can gift even more than $14,000 per year tax-free, but other gifts above and beyond $14,000 are taxable. This is important to keep in mind if you are planning on giving someone a big gift like a car. Most cars are worth more than $14,000, (or even $28,000 if you and your spouse are gifting jointly), so any amount over the $14,000 cap is going to be taxed.
The gift tax limit resets every year, so there is still time to maximize your gifting for 2016 if you have not done so already.