PARENTS GIFTING TO HELP THEIR KIDS BUY THEIR FIRST HOME.. INFO ON TAX CUTS

PARENTAL GIFTS TO CHILDREN ARE A HOT TOPIC ON “LEGAL-LINE”……WHAT EVERY BROKER SHOULD KNOW ABOUT GIFTING………

Matters of gifting arise in our practice on a continuing basis. Recently a Broker contacted “Legal-Line” inquiring on behalf of parents who were interested in “helping” their son and daughter-in-law to acquire a new single-family residence, but were limited in their opinion by a $14,000.00 gift limitation. The problem was that $14,000.00 was less than they wanted to give and they had heard that gifts above this level were “taxable” and were concerned as they did not want to pay any gift tax.

This is an area of practice that we encounter on an on-going basis. There are plenty of misunderstandings out there on gifting and taxes. Especially now with new tax laws coming into existence, the questions only increase. I hope in this short writing to clarify some of those matters and provide all our readers some tax information that can be valuable for you in your practice.

MORE AND MORE PARENTS WISH TO GIFT FUNDS TO THEIR KIDS TO BUY HOMES

With the increased cost of homes and with more conservative lending standards, it is anticipated that a significant number of parents are going to gift cash to their children to enable them to purchase their first home.

ANNUAL GIFT EXEMPTION IS $15,000.00 PER DONEE IN 2018

This is where we start. The annual gift exemption has been at $14,000.00 since 2013 so many of our readers will remember that number. It is $15,000.00 per donee per year starting now in 2018. This is a long-established exemption to FEDERAL GIFT TAXES. [There is no GIFT TAX in Washington state. There is an ESTATE tax, but no gift tax in Washington State].

This means that each individual can give to EACH DONEE up to $15,000.00 per year with no gift tax and no gift tax return required. So, if a husband and wife wanted to gift to their son and daughter-in-law they could gift a total of $60,000.00 under this rule. A husband can gift $15,000.00 to his son and daughter in law and the same can be said for the wife to gift to son and daughter in law as well. No reporting to the government required.

WHAT IF THE PARENTS WANTED TO GIFT $200,000.00 OR EVEN MORE?

This is the situation we experienced recently in a “legal-line” inquiry that has prompted this weekly update. The parents wanted to gift $200,000.00, but were again concerned about gift taxes. This is a valid concern. However, we have ways of working through this situation with no tax concerns whatsoever.

IT’S CALLED “THE UNIFIED GIFT AND ESTATE TAX CREDIT”

Now that is a mouthful. At the Federal level, each individual has during his or her life a credit that can be used for gifts during life and for gifts at death. The amount has changed over the years and was, at one time, as low as a million dollars per individual.

With the new tax law coming into existence as of December 17^th last year, the new tax law will change things now for the “better” (at least until 2025 when the new law sunsets). The new law allows an individual approximately $11.2 million in gift and estate tax exemptions and with “portability” (i.e. allowing a married couple to combine their credits), a married couple can exempt approximately $22.4 million in assets against their estate value. For majority of Americans, there is no longer a federal estate tax upon their death.

What does this mean? It means that each of us has a life-long credit on the books at the federal government. That credit is now over $11 million dollars that we can use as we may to gift DURING OUR LIFE or UPON OUR DEATH or BOTH!!! For most of the population this amount is well above their asset base and allows a freedom of gifting not realized in the past.

SO HOW WOULD OUR “LEGAL-LINE” PARENTS MAKE THEIR $200,000.00 GIFT?

They wanted to gift $200,000.00 to their son and daughter in law.

First: we would (as above) take advantage of the $15,000.00 per person per year and that would allow the parents to freely gift $60,000.00 with no tax consequences or reporting whatsoever. [Look at the calculations above].

Second: we would (as above) take advantage of the huge federal gift credit and freely gift $70,000.00 by the husband and $70,000.00 by the wife (for a total of $140,000.00) with no gift tax consequences EXCEPT they must file a gift tax return in the year of the gift, but no tax to pay just an informational return to file.  Easy. Quick.

PRACTICE POINTER: If you have parents out there thinking of gifting, it is a marvelous way to help the kids get into their first home. They need NOT be focused on the limitation of the $15,000.00 rule. We are happy to consult and assist parents in utilizing their “Uniform Federal Gift and Estate Tax Credit. Just call our office.