Giving Gifts in Indiana

Giving gifts

You might think that the government has no interest in you giving gifts to, say, a family member or friend. You would, however, be wrong. Under certain circumstances, if you give a gift—defined as any transfer to an individual where full consideration is not received in return—the IRS requires that you file a gift tax return for the year that the gift was given. Certain gifts—e.g. gifts to a spouse, gifts under a certain amount (explained more below), and/or gifts to a political organization—are excluded. Additionally, charitable contributions are treated differently. But otherwise, gift giving may give rise to an obligation to file a gift tax return.

Why does the government care?

Part of the government’s motivation for requiring gift tax returns is to prevent you from getting around the estate tax. When your property passes at your death, the government, under certain circumstances, gets a cut. That means the government doesn’t want you giving away a huge chunk of your property right after you receive a bad medical diagnosis. By requiring you to file a gift tax return, the government can keep track of how much you have given away during your life.

As things currently stand, however, actually paying taxes on a gift that you give probably isn’t something that you have to worry about. This is because the estate tax and the gift tax are, in a way, linked. And the federal estate tax currently has an exemption of $5.43 million. That is, when you die, so long as your estate (and the gifts that you’ve given) is less than $5.43 million, your estate won’t pay any taxes. That means that you could, potentially, give up to $5.43 million of lifetime gifts and not owe any tax.

Examples

Some examples will help:

Example 1

  1. Joel gives $100,000 to his son in 2015.
  2. Joel dutifully files a gift tax return in April, 2016, letting the federal government know that Joel gave a $100,000 gift.
  3. Joel dies in May, 2016, leaving an estate of $6.33 million.
  4. The federal government exempts the first $5.43 million, leaving $900,000 to be taxed.
  5. The federal government also notices that Joel gave $100,000 in 2015 to his son. Instead, therefore, of only $900,000 being taxed, $1 million ($100,000 plus $900,000) will be taxed.

Example 2

  1. Joel gives $100,000 to his daughter in 2015.
  2. Joel dutifully files a gift tax return in April, 2016, letting the federal government know that Joel gave a $100,000 gift.
  3. Joel dies in May, 2016, leaving an estate of $200,000.
  4. The federal government exempts the first $5.43 million, leaving nothing to be taxed.
  5. The federal government also notices that Joel gave $100,000 in 2015 to his daughter. Joel is still well below the $5.43 million exemption, leaving nothing to be taxed.

Example 3

  1. Joel gives a $6 million gift to his friend in 2015.
  2. Joel files a gift tax return in April 2016, letting the federal government know that Joel gave a $6 million gift and paying taxes on $570,000 of that gift ($6 million minus the $5.43 million exemption).

Filing even though you aren’t paying

As you can see from the examples, unless you have a sizeable estate, paying a gift tax to the federal government is probably not something you have to worry about. But even if you don’t owe any taxes on a gift, if you give a qualifying gift over a certain amount, you must still file a gift tax return. In 2015, the amount is $14,000 to any individual. So if I give $15,000 to my son in 2015, I must file a gift tax return even though I don’t have to pay any tax on that $15,000. The federal government still wants to keep track of what I’ve given during my life (just in case I end up with a sizeable estate when I die). I could, however, give $14,000 to one son, $14,000 to another son, and $14,000 to my daughter, and I wouldn’t have to file a gift tax return. So long as I don’t exceed the $14,000 limit to any one individual, I’m in the clear regarding my filing obligations.

What about Indiana?

I’ve so far said plenty about the federal government but nothing about Indiana. This is because Indiana, not too long ago, got really simple. Indiana repealed its “inheritance tax” (similar to, but not the same as, the federal gift and estate tax) for individuals dying after December 31, 2012. That means you could die with a $10 million estate in Indiana, and neither your estate nor your heirs would owe any tax to the state of Indiana (though remember: the federal government would be a different story).

Confused?

If these seem like the sorts of things you’d rather not lie awake at night thinking about, that’s why I’m here. Estate planning is one of my specialties. Please schedule a consultation with me at your convenience so that I can help you create the best possible plan for you and your loved ones.

–Joel Dendiu

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