Hey Dave,
I’ve never been married, and I have no children. I’ve been successful in my career and I have a lot of money saved. This year I want to give my six nieces and nephews $20,000 each for Christmas. But before I do, I want to make sure they won’t have to pay taxes on the money. And I am assuming I can deduct it all on my own tax return, right?
Auntie Angie
Angie,
The good news is that these gifts will not be considered taxable income to your nieces and nephews. But, unfortunately, there is no deduction allowed for the gifts either. And since the individual gifts exceed the annual gift tax exclusion amount of $14,000 per person, you will be required to file a gift tax return for 2014.
Form 709, United States Gift Tax Return, is due on April 15th, even if there is no tax owed. The form is used to track how much of an individual’s lifetime exclusion ($5.34 million for 2014) has been used. The lifetime gift tax exclusion is reduced by the taxable gifts that have been reported on Form 709 during the lifetime of the individual. Amounts over the exclusion amount are taxed at the estate tax rate.
Although it is not tax advice, if your nieces and nephews are still minors or college age, it may be a good idea to discuss your plans with your siblings before presenting these gifts to your nieces and nephews. If they object to their children receiving that much cash, you might be able to work something out with them that would keep all parties happy. For example, they may prefer that you fund a college tuition 529 plan rather than make the gifts directly. One advantage to you of contributing to a 529 plan is that for gift tax purposes you can account for the gift ratably over five years, rather than account for it all in one year. Thus, you will not have to worry about exceeding the $14,000 limit, unless you make large gifts in the future. And, if your nieces and nephews are already college age, you should keep in mind that amounts you pay directly to an educational institution for their tuition would be exempt from the gift tax requirements. The same would be true for medical expenses that you pay directly to a medical provider on their behalf.
We hope you enjoy your holidays.
Deductibly Yours,
Dave