I have given quite a few seminars over the past five years on estate planning and have answered many, many questions. I have also helped many clients and provided all the information I can so those clients can make a knowledgeable decision regarding their estate plan. So, I want to spend the next few posts going over questions I run into with estate planning to help spread more knowledge to the people of Altus and the surrounding areas of southwest Oklahoma (and the world).

Common Question: I heard that I can give away $10,000 each year without having to pay taxes on it. I paid too much in income taxes last year and I would like to use this deduction by giving it to my kids.

The Answer: There are a few misunderstood concepts in the above scenario, so let’s straighten them out.

First, you are alluding to the Annual Gift Tax Exclusion. When the law was updated in 2001, it said that one person could give any other person up to $10,000 per year and there would be no requirement for gift tax reporting. The $10,000 amount is adjusted for inflation, and currently, in 2013 the amount per year is $14,000. Married couples can combine their exclusions and give an individual up to double the exclusion amount, but they will have to file a gift tax return to show they split the gift.
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Next, even if someone did exceed the $14,000 amount and gave another individual more in a single year, there still would not be taxes due. This is because in addition to the annual exclusion amount, there is a lifetime exemption amount that must be used prior to actual taxes being due. The lifetime exemption amount is tied to the estate tax exemption amount and is currently $5,250,000 per person. So, you have to give significant gifts prior to there being taxes, but only relatively small gifts (exceeding $14,000) for there to be reporting.

Lastly, there is no deduction for giving money or property to kids, so if it is income for you, you cannot assign it to your children and take a deduction on your tax return. If you are interested in “income shifting” then there are more complicated steps which need to be taken, but most people do not want to follow through with those requirements.

If you would like to set up a consultation to discuss your estate plan or tax plan, then call 580-318-8829 for an appointment today. Mention this post and receive a one-hour complimentary consultation!