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Gifting under the Tax Cuts and Jobs Act

by Neil Downing

Planning to give away some of your money or other assets? The rules have changed—and you may benefit. Congress’s once-in-a-generation transformation of federal taxation, which President Trump signed into law in December 2017, not only affects the personal income tax, but also has an impact on gift and estate taxes. So when it comes to making gifts, it’s helpful to know what has changed—and what hasn’t.

Annual Exclusion

If you give someone anything of value, federal gift tax rules may apply. You generally may give your spouse an unlimited amount without triggering federal gift tax complications. But if the gift is to someone other than your spouse, there can be federal gift tax consequences. More about those consequences later.

However, amid all the historic revisions in federal tax law, one of the most basic gifting techniques remains: “You can still give someone a certain amount each year without triggering federal gift tax complications, through what’s known as the annual gift tax exclusion,” said Tiffany Walker, CFP®, ChFC®, a senior wealth planner in CAPTRUST’s Minneapolis office.

The amount of the exclusion can change each year, depending on inflation. In recent years, it has barely budged.

For 2018, however, the threshold has jumped more than 7 percent to $15,000. “So any one person can give that amount to any number of people this yeusedar without incurring gift tax consequences,” said Cara H. O’Brien, editor/author with Thomson Reuters Checkpoint.

Suppose that in 2018, Wendy, who is single, wants to make some gifts in cash or by check. She can give a total of up to $15,000 to her son, $15,000 to her daughter, $15,000 to her nephew, $15,000 to her niece, and $15,000 to her neighbor—for a grand total of $75,000—with no federal tax consequences of any kind, either for Wendy or for the gift recipients.

If you’re married and both spouses consent through a process known as gift splitting, the amount of the annual exclusion is doubled to $30,000 per recipient, said Philip D’Unger, CFP®, a wealth solutions specialist in CAPTRUST’s Consulting Solutions Group. So in the example above, if Wendy is married and her spouse consents, they can give a combined total of $150,000 in 2018.

For the annual gift exclusion to work, the gift must be of a present interest. That is, the recipient must have all immediate rights to the use, possession, and enjoyment of the gift, O’Brien said.

Timing is important also. “To take advantage of the current federal gift tax exclusion, you must make the gift within the current calendar year. So checks must be cashed prior to year-end,” Walker said. “Proactive planning is really helpful,” she said. When the new calendar year begins, it’s a new season for making gifts.

What to give? “Usually, cash is the best vehicle,” Walker said. If you give something other than cash that has risen in value over time—such as shares of common stock—the recipient assumes your cost basis in the asset for tax purposes. So if the recipient sells the asset, the recipient must pay income tax on any appreciation.

What if the gift exceeds the annual exclusion amount? You still won’t have any federal gift tax worries if you take advantage of certain loopholes in the law, which apply without regard to the relationship between the giver and the recipient.

What if the gift exceeds the annual exclusion amount? You still won’t have any federal gift tax worries if you take advantage of certain loopholes in the law, which apply without regard to the relationship between the giver and the recipient.

For instance, there’s an unlimited exclusion for college tuition expenses. No federal gift tax consequences are triggered if you pay for someone’s college tuition so long as the payment is made directly to the college or university.

There’s also an unlimited exclusion for medical expenses. No federal gift tax complications arise if you pay for someone’s medical expenses if the payment is made directly to the provider of medical care and if the expenses aren’t reimbursed by insurance.

Section 529 Plans

State-sponsored college-savings plans—known as Section 529 plans—are a popular way to save for a beneficiary’s education. You don’t get a federal income tax deduction for contributing (though your state may offer a deduction), but your contributions can grow on a tax-deferred basis. Withdrawals aren’t treated as income for federal tax purposes if used to pay for the beneficiary’s education expenses. (Your state may offer a similar tax break, too.)

Contributions to 529 plans count for purposes of the annual gift tax exclusion. Therefore, you can contribute up to $15,000 in 2018 to a 529 plan on a child’s or grandchild’s behalf without sparking federal gift tax concerns.

The gift-splitting rules apply too. So if you and your spouse have two grandchildren, for instance, you can contribute up to $30,000 this year to a 529 plan for each beneficiary—for a combined total of $60,000—without federal gift tax issues.

The old five-year rule still applies: “If you contribute more than the annual gift tax exclusion amount this year to a Section 529 plan on a beneficiary’s behalf, you can choose to treat up to $75,000 of the contribution as if you had made it ratably over a five-year period without triggering federal gift tax issues. Keep in mind that the other rules involving the gift tax exclusion still apply,” D’Unger said.

Elementary and Secondary Schools

Section 529 plans have added appeal now, thanks to a recent change in the law. Formerly, withdrawals typically qualified for favorable federal tax treatment only if they were used to pay for a beneficiary’s higher education expenses, such as college tuition, fees, books, supplies, and certain computer equipment and software.

However, as a result of the Tax Cuts and Jobs Act enacted in December 2017, withdrawals now also typically qualify for favorable federal tax treatment if used to pay for the beneficiary’s education expenses at an elementary or secondary public, private, or religious school.

Under the new law, tax-free withdrawals for such education expenses are limited to $10,000 in the aggregate per year, per beneficiary. But that’s still enough to potentially cover some or all of the student’s costs. Nationwide, the average cost for private elementary schools is $9,398 per year and $14,205 per year for private high schools, according to Private School Review, a provider of information on private schools.

Taxable Gifts

The federal gift tax exclusion is helpful, but what if the amount you give to someone other than your spouse exceeds 2018’s $15,000 annual threshold amount, and none of the strategies described above applies?

It’s not the end of the world because another rule kicks in, involving your lifetime gift and estate tax exemption. In effect, the amount of your taxable gifts consumes a portion of that lifetime exemption amount.

For most people, that’s not a big deal. But if you have a large estate, it could result in problems. The lower the amount of your available lifetime exemption, the less that’s available to shelter the remaining assets in your estate from federal estate tax when you die.

Even here, though, you may catch a break. The lifetime exemption amount, which was $5.49 million for 2017, has more than doubled to $11.18 million for 2018 because of the Tax Cuts and Jobs Act (and an inflation adjustment). “That’s just a big jump,” said O’Brien.

So yes, taxable gifts will erode your lifetime exemption. But because the amount of the lifetime exemption has ballooned, there’s a lot more room to maneuver. “That’s a huge benefit,” D’Unger said.

Estate Tax

Having a lower lifetime exemption amount at death may not be such a bad thing, either, because of the way the estate tax works.

“For example, if you’re married, and leave your estate to your spouse, there typically are no federal estate tax consequences at that point,” D’Unger said.

How about when your surviving spouse dies? Your spouse’s estate gets to take advantage of his or her own lifetime exemption amount, and his or her estate gets to apply any of the lifetime exemption amount that your estate had not used up, thanks to a feature called portability.

That can protect a lot of assets from the federal estate tax. For example, if the husband’s estate used none of his lifetime exemption amount, and his spouse dies afterward, that spouse gets to shield more than $22 million from the federal estate tax.

There are potential state tax issues though. Twelve states and the District of Columbia impose an estate tax, while six states have an inheritance tax, according to a recent tally by the Tax Foundation, a tax policy and research organization in Washington. Also, exemption amounts for state estate taxes vary by state. For example, in Massachusetts, it’s only $1 million.

So even if the size of your estate won’t trigger the federal estate tax, it could trigger a state estate tax depending on where you live and your state’s rules. Careful planning can help you avoid both.

Charitable Contributions

Making a gift to someone else may result in federal gift tax complications. What if you give to a charity? The issue is not the gift tax but the income tax: You may benefit by claiming a federal income tax deduction.

The Tax Cuts and Jobs Act nearly doubled the amount of the standard deduction, making it more appealing to many taxpayers. And there’s the rub: You may claim a charitable deduction at the federal level only if you itemize. Because many itemizers will be claiming the now-more-valuable standard deduction in the future, they won’t be deducting charitable contributions.

Fortunately, there are ways to deal with that if you’re charitably inclined. First, establish an annual giving plan. “That way, you can be better positioned to take advantage of certain techniques,” Walker said. “We look for creative opportunities to either get clients above the standard deduction threshold or reduce their income for tax purposes,” she said.

For example, suppose your charitable contributions and other deductions would not, when combined, total more than the amount of your standard deduction in a given year. In that case, claiming the standard deduction makes sense.

But if you bunch two or more years’ worth of charitable contributions into a single year, that could help push you over the standard deduction threshold for that year, giving you a bigger tax break through itemizing.

If you’re in your peak earning years, consider donating some of your highly appreciated assets—such as shares of common stock—directly to the charity instead of cash. “That way, you get the charitable deduction (assuming you itemize) and can avoid paying tax on the gain—generally, the amount by which the asset has risen in value,” Walker said.

Using Your IRA

If you’re retired and must make annual withdrawals—also known as required minimum distributions, or RMDs—from your individual retirement account (IRA), think about having your IRA trustee move at least a portion of your account directly to a charity, through what’s known as a qualified charitable distribution.

You must be at least 70½, and the amount you can donate is limited to $100,000 per year. But there are several benefits. For instance, you won’t have to pay income tax that might otherwise be due because the withdrawal won’t count as income to you (assuming the money goes directly to the charity). Also, the distribution will count toward your RMD, so you could satisfy some or all of your RMD.

With many of the techniques described here, there is another potential benefit. “Giving away some of your money or other assets while you’re alive will reduce the size of your estate, perhaps enough to reduce or even eliminate the impact of estate taxes that may be due upon your death,” O’Brien said.

Will the tax code changes result in fewer taxpayers donating to charity? “Fewer taxpayers will probably benefit from itemizing” and, as a result, may not give as much to charity, O’Brien said. However, “A lot of people give charitably just because they want to give,” not necessarily for tax reasons, she said. So some taxpayers will end up itemizing anyway. “If people give enough, then they will itemize, so people may actually give more,” she said.

Overall, “It doesn’t seem like charitable gifting is going to go away because of the new tax law,” D’Unger said. However, “People are going to be more strategic in how they give to charity,” he said.

Need to Consult and Plan

The far-reaching changes wrought by the Tax Cuts and Jobs Act and other factors make it even more important to consult your legal, tax, and financial advisors, to plan ahead.

For example, a number of tax changes will themselves change come January 1, 2026, so careful planning is even more vital now. “The more long-term you can be in your thought process, the greater the benefit can be to you,” D’Unger said.

Even if you’re not worried about what happens with the law after 2025, the changes generated by the Tax Cuts and Jobs Act in the meantime may affect your existing estate plan, so you should consult your advisors about the possible need to make changes to your existing will, trusts, and other important documents and plans.

Remember, too, that taxes, while important, aren’t the only factor to consider. “It’s a larger discussion,” one that takes into account your own goals and values, Walker said.