Ep. 141 | Gift Taxes 101
Download MP3Hey, everybody, and welcome back to the teaching tax full podcast. Today, episode 141, we are diving into gift taxes. That's right. We've titled this one gift tax one zero one. But before we get into this one in any depth, let's take a brief moment and thank our episode sponsor.
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John Tripolsky:The teaching tax flow podcast. We know you're excited to be here because we have a little gift for you. That's right. We're talking about gift taxes or gift taxes one zero one, how that relates to you, and how the IRS expects you to report and potentially pay on those taxes. So as we get into it, as always, right, just think about an example of, let's say, maybe you're gifted something.
John Tripolsky:You had a, as Chris likes to say, a rich uncle potentially pass away or just, you know, you have a bunch of cash, I will say, left in your mailbox or, you know, it's your bank account. But before we get into it, as always, let's welcome back the man of the half hour, Chris Pacira. What's happening, buddy? How are you, man?
Chris Picciurro:I'm well. How are you doing today?
John Tripolsky:Good. Good. You like how I referred to you as the man of the half hour? That means you could be twice twice as impactful within a six
Chris Picciurro:We're we're gonna try because this is a question we get often in our private CPA practice and in defeating taxes, private Facebook group about gift taxes. There are a lot of opportunities right now with the Tax Cuts and Jobs Act for some planning, and, we're recording this in 2025. So we're gonna talk through the rules that we are living in right now in 2025. We're about halfway through the year, because gift tax doesn't always have to be addressed at the very end of the year. So there's a lot of confusion as to what is the gift tax, how it, interplays with your federal estate tax.
Chris Picciurro:And are there special rules for different types of assets, that could be gifted, specifically, business interests and, what we call super funding of 05/29 plan. So, yeah, we're gonna talk about all that today. Obviously, you're gonna want to if you're listening to this, first of all, thank you for your attention. Second of all, you're gonna wanna talk to your tax professional and definitely attorney when you're thinking about doing any type of advanced gifting. Obviously, you know, some modest Christmas gifts, slipping a $100 bill to your child or grandchild, is not a a big deal.
Chris Picciurro:But, but, yeah, you definitely wanna be, aware of things because one thing to remember is that when you inherit property, that you get a stepped up basis, cost basis. When you gift it, you inherit the giftor's basis. So it doesn't mean a big deal when you're talking about cash, but let's say you have a, let's say you have a piece of land that grandma and grandpa bought many moons ago for a $100,000. It's now worth a half a million dollars. And if they just gift it to you, then your cost basis is a $100,000.
Chris Picciurro:If you turn around and sell it a year later for 500, you're paying tax on $400,000. However, if if they if you inherit it and it's worth $500,000, your cost basis is $500,000. If you turn around and sell it for $500,000, you're it's reportable, but you're not paying any tax because there was no gain. So that's where the biggest mistake I see with people is gifting appreciated assets is typically a bad idea when you're talking about, you know, family members. But, yeah, let's let's jump into this because remember, tax agencies are your involuntary business partner, and, the IRS, is is the collection agency for the federal government.
Chris Picciurro:And this might sound a little grim, but it but it's a lot easier to pass legislation and to assess tax on someone that's deceased rather than someone that's living because deceased people don't vote. So you've got when you're talking about the interplay between gift and estate tax, and there is one, that's where, you know, that's where things get a little murky. So gift tax is is a way to, or gifting is a is a strategy that many people use to get assets out of their estate to reduce their exposure to estate tax. And is the right now under the Tax Cuts and Jobs Act, the estate tax exemption is very high. It's almost $14,000,000 per person, but that could easily get slashed by 75% based on the results of a future election.
Chris Picciurro:So that's really what what it is. So in in when we talk about gift tax, so gift tax is simply a tax imposed on the transfer of assets. Okay?
John Tripolsky:And I'm glad you started with defining that right too because a lot of people might think, well, what what exactly is this? Right? Like, are you giftings? I mean, who know? We've had some very literal fingers that we've run into, right, that I wouldn't say tend to question everything, but they do.
John Tripolsky:And, you know, it's good. You know, it gives us a little drive. But I and I also like going back to it really quick, Chris. You mentioned basically that is it called a threshold really when you say you know, it's like was it 13,000,000 something? Is that the the term that's used for that?
Chris Picciurro:Well, that's the estate tax exemption. So, ultimately, remember, yeah, if you if your assets are over the estate tax exemption the year you pass away and that's a moving target, that's the number that can go down, then you could be assessed up to a 50% estate tax. So gifting is a way to get assets out of your estate. And and it's not just estate tax. There could be people looking for Medicaid eligibility, v veterans, VA benefit eligibility.
Chris Picciurro:Need there there's a lot of reasons you would gift assets out of your, estate. So so, yeah, that's that's that's the thought because if if it's if you're gonna let's say, you're subject to a 50% estate tax, you might as well give away things to get under that limit. But, again, there's a right way and a wrong way to do that. So who pays the gift tax? This is the first so we we've already defined what a gift tax is.
Chris Picciurro:But who pays it? And this is what's really confusing. I'd say eight out of 10 people or four out of five, I guess it's the same thing, would get this answer wrong. The donor pays the gift tax if there is a gift tax and or files a gift tax return if you're supposed to file a return. Most of I mean, I would say 98% of the time in my twenty plus years, probably 99, When a gift tax return is prepared, there's no actual gift tax paid.
Chris Picciurro:It's more informational. But the person giving the gift, which is called the donor, is the person that files a gift tax return and pays any gift tax. The the donee or the person getting the gift does not file a gift tax return. Now there are special rules if you're getting international guests. We're not gonna talk about that, and we're talking on the federal level.
Chris Picciurro:Some states have different rules. So if you file a gift tax return, it's the person giving the gift, not getting the gift that files the return and pays any tax, which is very rare. Again, that's something that that is confusing. You know? It seems like, well, why is someone that's benefiting from it not having to pay any tax or or file anything?
John Tripolsky:I would've got it wrong. Let's be honest. I would've totally thought it would've been the other way around because it would make sense almost. Right? It it's almost like getting a paycheck.
John Tripolsky:Right? You're, I mean Mhmm. Sure. Your employee's paying tax on part of it. But yeah.
John Tripolsky:Yep. I just thought it would have been other other ways too.
Chris Picciurro:So every year, we have an annual gift tax exclusion. And what this amount is is this is the month that people can give to each other without having to file any type of gift tax return or eat away or utilize any of their estate tax exemption. So if you exceed the annual gift tax exclusion, you don't owe gift tax. What happens is you start eating away at that lifetime exclusion based on whatever the estate tax exemption is for the year. So let's look at the so that annual gift tax exclusion is $18,000 per recipient per year.
Chris Picciurro:So as long as you're not giving someone more than $18,000 a year assets, then you don't have to file a gift tax return. So probably 99.99999% of gifts will never file an know, if you think about all the holiday gifts and all that kind of stuff, file a gift tax return. But if you give more than $18,000 per recipient per year, you would file a gift tax return. You have an unlimited amount of recipients, and married couples can actually each give $18,000 to their children per year or or whoever the heck they want. So a lot of times, I'll give you an example.
Chris Picciurro:We we run into the situations where there might be a younger couple. They they can afford to to purchase a home as far as from a monthly income perspective, but they're struggling to get the down payment. Right? And the parents can gift let's say the the parents need to give $50,000 to a younger couple. Let's say they have a daughter and a and a son-in-law, you know, and they well, if mom just gives the daughter $50, she's now $32,000 over the $18,000 state or the gain you'll give tax limit.
Chris Picciurro:But if mom gives daughter $18, dad gives daughter $18, and then mom and dad give the son-in-law, hopefully, he's a nice guy, the remaining amount, no one's given anyone more than $18,000, and they have $50,000 tax free. They can use that for a down payment on their on their first home. It doesn't have to be a first home, but I'm just using that as an example. Those are practical things we look see all the time in our tax world. How did efficiently transfer money from one person to the other?
John Tripolsky:And I'm sure you guys have seen it too in the past. Right, Doug? Say there's, excuse me, say there's two people, mom and dad. Right? And they say, oh, well, you know, just here here's a check for I don't know.
John Tripolsky:We'll we'll just call it, yep, 36,000. We'll just call it what is. There you go. Here hey. Here's a check for 36,000.
John Tripolsky:Mom writes it, sends it off. Dad writes it, sends it off. Oh, and we'll just tell them it came from both of us. Is that how it works? Or
Chris Picciurro:Technically, well, they can eat, like, what's called gift splitting, but then you would have to do that on a tax form. So they would probably wanna write two checks. And I mean, here's another practical example. Daughter's getting married. Mom and dad wanna contribute $50,000 to her wedding.
Chris Picciurro:That's very generous. Oh, we got a challenge. Right? So what would I recommend? Well, maybe mom and dad give her $18,000 each on December 30.
Chris Picciurro:And then January 2 of the next year, fill it up, fill up the remaining amount, and never and a gift tax return is not filed. So there's a work I don't say workarounds, but I would call it a planning opportunities to avoid having to file return. However, remember, the vast, vast majority of gift tax returns, there's no tax paid. It's information only. Now what happens if you if your gift goes over the annual exclusion of $18,000?
Chris Picciurro:At that point, you have to file a gift tax return. That is for called an form seven zero nine from on the federal side. Again, some states conform to the federal gift tax rules, some do not. And at that point, if you did that in 2025 so, John, if they if the parents let's say their parents had said, hey. I wanna give my daughter a $100,000.
Chris Picciurro:Well, good good for daughter for for winning the parent lottery financially. They give her a $100,000. They've each given her 50. $32,000 each is is reported on a gift tax return and eats away at the $13,610,000 unified lifetime estate gift and estate tax exemption. So ultimately, probably not going to be taxable, but it is reportable.
Chris Picciurro:But remember, that 31.69 or $61,000,000 per person gift tag. Anyway, sorry. Unified estate exemption that could change at any time. So during this tax cuts and jobs act era, we're seeing a lot of very wealthy families gift money out of their estate now at that $13,610,000 mark into maybe you know, there there are advanced strategies for advanced situations into maybe a irrevocable trust. So it's out of their estate, and the beneficiaries can't you know, they can't utilize that money.
Chris Picciurro:Again, you're gonna wanna talk to a state planning attorney on that. But, ultimately, when that gift goes over the annual exclusion, you have to file a seven zero nine. You report the gift. You don't necessarily have to pay tax on it. It eats away at that your unified credit or that lifetime estate tax exemption.
John Tripolsky:That's probably one of the best examples too you mentioned about the weddings. Right?
Chris Picciurro:Mhmm.
John Tripolsky:It's very far and few between your fun and a wedding under eighteen year end in these days, especially. And I and I would I mean, I would probably say, and this is just me guessing. Right?
Chris Picciurro:Mhmm.
John Tripolsky:That there is probably maybe one out of a 100, probably more than that, that look at it from the eyes of what we're talking about. Right? Instead of, oh, well, it's not a gift. Really, I'm just I'm just paying for it. I'm covering it for them.
John Tripolsky:I'm not giving them anything. Right? It's not like I'm giving them cash. I'm paying for it. So they probably think that it doesn't even need to be reported.
John Tripolsky:So they're looking at it maybe as a personal expense instead of a gift, but it's actually a gift. Right?
Chris Picciurro:It could. Right. So that brings up a good point. What is a gift? It's transferring property without full consideration.
Chris Picciurro:Meaning, I'm gonna give you I'm gonna give you, you know, cash. I'm going to give you an asset for less value. But there are certain things that are not considered gifts. So planning comes into play. Tuition and medical expenses, they're paid directly to the provider, are not considered a gift.
Chris Picciurro:So think about this. Let's say you have a college aged student. Let's say the tuition is $50,000 a year. Or let's say you have a grandchild that has some severe medical issues and at $50,000 a year. The grandparents wanna cover that, which is very generous.
Chris Picciurro:If they give the money to the parents or the grandchild directly, it could trigger a gift tax return. However, if they pay the medical expense directly or the tuition directly to the their medical provider or the the financial institute, then that's not considered a gift. So, again, there's a lot of planning involved when you get into these family situations that we live in, quite a bit. And, so so that's why for parents, it's it's just kinda cleaner and grandparents or whoever to pay the the any type of tuition or medical expenses directly to a provider, not a taxpayer.
John Tripolsky:And that is interesting because, again, I bet you a lot of people just don't even know, you know, where it falls. Right? So they just they just think they're being they're relieving a financial burden instead of giving a gift. That sucks.
Chris Picciurro:Right. So so the ultimately, it's like this. When you're talking as a tax professional, when you're talking to clients and people, what what people like to tell you the stories that are kinda irrelevant. Sorry if you're listening to this and you've told me a story over the last twenty years to the fact pattern.
John Tripolsky:Theirs was good, though. Just everybody else.
Chris Picciurro:It was the right. Yeah. It's irrelevant to your life, but it has nothing to do with I really care the of the why. I'm trying to figure out the what. What are you trying to accomplish?
Chris Picciurro:Are what are you are you trying to get money to this person or that person or that way? Just once I figure out what they're trying to accomplish, then we can make a plan to make it tax efficient. Now let's I wanna touch on that seven zero nine form that I previously mentioned. The seven zero nine form, the gift tax return, is due on April 15 of each year just like a form ten forty, but can easily be extended for six months. Really easy to do.
Chris Picciurro:Remember, married couples can elect gift splitting, which on that seven zero nine. Meaning, like you mentioned, if dad technically wrote the check for a 100,000, they can they can on the tax charge say, yeah, dad wrote the check, but we're electing that mom and dad split that that gift. Now it's cleaner just to reach them to write separate checks. But, again, we don't you know, people do things all the time without before getting, you know, the proper advice, unfortunately. But if you're listening to this podcast, so hopefully, you're not going to those people.
John Tripolsky:And if you start going down that path, you go back and listen to some other episodes.
Chris Picciurro:You should. You'd be smarter for it. Alright. I'm gonna talk about two advanced planning strategies because, again, we you know, there's a lot of information about gifting. We're gonna continue to add on the teaching tax law YouTube channel.
Chris Picciurro:More information about gifting. There's already some good information about estate. I I'm you know, what we're finding is there is a thirst for estate tax planning information. Actually, John, it's interesting. Our estate tax episodes seem to get I I think as I have the most lessons and downloads.
John Tripolsky:I think so.
Chris Picciurro:Crazy.
John Tripolsky:Take care.
Chris Picciurro:But that's important. So we're gonna add to that. We're gonna get some some more content up. But there's two common advanced planning strategies when it comes to gift tax. Alright?
Chris Picciurro:The first one's gonna be around a concept of valuation discounts. Meaning, let's say, John, you own a business and you like to you remember you at one point, we said you were, crocheting up a storm. And let's say you've you've crocheted your way into having the best best company in in, in the Midwest. And you want and and it's worth a lots of money. Right?
Chris Picciurro:You wanna gift some of those assets out of your estate while you're alive. Well or after you passed away. It could be part of your estate. Well, here's the thing. The concept of valuation discount says, if you have a closely held business without the matriarch or without one of the key people in the business, the business isn't worth as much as it would be without them.
Chris Picciurro:So because there's a lack of marketability, lack of control, a lot of times, the fair market value of the of the company equity is reduced by 20 to 40%, typically.
John Tripolsky:So you're saying that I hold all the crochet skills in my little hobby business. Business. So
Chris Picciurro:what we're saying is if you own a business and you wanna try to start transferring the ass the the some of the equity of that business out of your estate, make sure you talk to the right people. There could be something called a valuation discount. So in other words, if the business is valued at $20,000,000 with you, you might wanna consider an alternative valuation. That's where you bring in there's I mean, there are CPAs with just the APV. I think it's a credit business evaluator that we look at and say, okay.
Chris Picciurro:Is this eligible for evaluation discount, which is for which would help the taxpayer? Much more common strategy is funding the five twenty nine plans. Plans. Right? Because a lot of times, especially grandparents in general, but sometimes parents, sometimes rich uncles, etcetera, etcetera, want to fund a five twenty nine plan.
Chris Picciurro:Five twenty nine plans, check out our other content, subscribe to our YouTube channel. Just just put five twenty nine plan in there. You're gonna see a ton of stuff, but those are those educational savings plans. Well, some people wanna put more than $18,000 a year in the plan. Well, the IRS said, you know what?
Chris Picciurro:We think education's important. We know you're, we are your involuntary business partner, and we're gonna allow you to superfund a five twenty nine plan. What that means is that you could put up to $90,000 per beneficiary in 2025 into the five twenty nine plan in in 2025 and then make an election to say, you know what? We're gonna spread that gift over five years so we know we don't touch our our state tax exemption. All we're doing is we're filling up that $18,000 per year annual gift tax exclusion.
Chris Picciurro:So there's that if you hear about that five year averaging rule, that allows married couples to super fund, basically front load up to $180,000 into a college savings accounts for their kids and never, not even you know, they'll they'll they'll prepare a gift extra to make the election, but they're never gonna eat away at that lifetime exemption. So those are really that one's really common, where we'll see, you know, we'll see that happen in in the real world. So going to wrap it up with just some some other considerations. You know, the more advanced or the more the larger your estate, the more complicated your estate. If you have real estate, businesses, trusts, you obviously need to to utilize different strategies for for those situations.
Chris Picciurro:So that, you know, as we and and I challenged you earlier. I don't know if I've heard it yet, though. The we're we're supposed to have a sound effect when there's an acronym. So we're gonna have more acronyms. We got grits.
Chris Picciurro:We got grits. We got gruts. These are all grant or retain trusts and and all these kinda cool things that could play a role if you have a more complex estate. Remember that Tax Cuts and Jobs Act is set to expire here soon, and the exemption for your the state could get chopped in half or or or reduced by by up to 75%. We're gonna see what happens with the tax loss.
Chris Picciurro:So that's that's that's gift tax one zero one.
John Tripolsky:Not too bad. I'm still caught up on the fact that I managed to needle my way into a $20,000,000 crocheting biz. I'm sure there's a different charms in that. Yeah.
Chris Picciurro:I'm sure you have a separate podcast for that.
John Tripolsky:That's my
Chris Picciurro:Called What do it?
John Tripolsky:Alter ego.
Chris Picciurro:It's Needling away or something. Something fun.
John Tripolsky:You know, I know somebody's listening to this. It's like, it is not called a needle a needle in crochet. You are incorrect. You are yes. I don't know what it's called.
Chris Picciurro:Hey. If you if if you know the proper term, please go on our YouTube podcast episode. And you know what? Slap a comment in there. You know?
Chris Picciurro:Slap back at us a little bit. I I like I like it.
John Tripolsky:Tell me how wrong we are with this. This would be perfect. But, yeah, no, Chris, this was a great one. Tell me about GIMP tax, obviously. And and I think you again, you brought up an example of, you know, wedding weddings.
John Tripolsky:I would that's probably one of the biggest things. Right? Like, it's and, again, I would have thought it would have been the other way around. Like, who pays the tax? Like, hey.
John Tripolsky:I'm giving you the gift. You pay it. You know, kinda do that deal, but then I get it on the other side of the fence too. So as always, though, we're wrapping this one up. Specifically, any questions, as Chris had mentioned too, comment on YouTube, Facebook, wherever you see this at, drop us a line, and actually tell us some examples maybe of things you could think of that are out there that people may not realize they are actually gifting something without reporting it appropriately.
John Tripolsky:So it'd just be interesting to see what people you know, things that you've done in the past or, you know, give us an alias and tell us that you did it. We don't care. It's more the more the context of it. But we'll see everybody back here again on the teaching text full podcast. Same day of the week, different time of the day, maybe completely different topic.
John Tripolsky:Switch it up every week. So we'll see everybody later. Have a good one. Again, like, comment, subscribe to the YouTube channel specifically or wherever you consume your podcast, and heck, share this with someone. Give them a gift.
John Tripolsky:Here's a tip. It is worth over $18,000 indirectly. But you're not gonna get taxed at sharing a podcast, so share with them. They'll thank you later. Have a great week.
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