Chanukah — a holiday full of light and family fun. Eating latkes and doughnuts (Sufganiot), lighting candles, playing dreidels and of course giving out presents.
When my children were little, they used to get a gift every day, right after candle lighting. The joy and happiness that were expressed over these small little gifts were priceless.
Some parents/grandparents give more significant gifts. If you are a US citizen you should be aware that gifting may result in submitting a gift tax return and may result in gift tax (although this is a possibility, it is less common).
In 2020 and 2021, each US citizen can gift up to the sum of $15,000 to anyone during the year. If you are married to a US citizen you can each gift up to the sum of $15,000, resulting in a $30,000 gift to the same person.
It is important to understand that the annual exclusion is per recipient; it isn’t the sum total of all your gifts. Meaning you can gift to anyone you want (such as children and grandchildren) up until the $15,000 limit.
Anything above that is subject to gift tax and counts against your lifetime limit). Gifts to nonprofits are charitable donations, and not gifts. Also tuition or medical expenses you pay for someone is not considered a gift
If you each give more than $15,000 in cash or assets (for example, stocks, land, a new car) during the year to any one person, you need to file a gift tax return. That does not mean you have to pay a gift tax. It just means you need to file IRS Form 709 to disclose the gift, by April 15th of the following year.
Gifts between US spouses are unlimited and generally do not trigger a gift tax return (if your spouse is not a US citizen, you can only gift him or her up to the sum of $157,000 for 2020).
On top of the $15,000 annual exclusion, all US citizens get an $11.58 million lifetime exclusion, any amount higher is due 40% tax (in 2021, that rises to $11.7 million unless Bidon decides to lower the exclusion).
For example, if you give your child $50,000 as a Chanukah present this year, this is $35,000 over the gift tax exclusion. So, although you will have to file a gift tax return, you most likely will not need to pay any gift tax. This is because the surplus of $35,000 will count against your $11.58 million lifetime exclusion.
Assuming you have never made any other gifts over the annual exemption, your remaining lifetime exemption will now be $11,545,000 ($11.58 million minus $35,000).
If nothing is changed, this high exemption is due to sunset at the end of 2025, back to the 2017 amount of $5 million adjusted for inflation. However, president-elect Joe Biden has the intentions to reduce the lifetime exemption to 3.5 million dollars per person already in 2021, and to increase the maximum tax rate to 45%.
This means that if one wants to take advantage of the high lifetime exemption, by gifting substantial gifts, now would be the time to do so before the law changes. Especially since the Internal Revenue Service has officially states in their tax regulations that they will not claw back into one’s taxable estate any gifts made before the exemption changes, if it is later reduced. Consequently, a US citizen can give his or her entire estate and gift tax exemption ($11.58 million) in 2020, and not be affected by a change in the estate and gift tax exemption under a Biden administration.
For those not interested in giving away the entire or large portion of their estate and gift tax exemption amount, there are several estate planning techniques available such as establishing grantor-retained annuity trusts (GRATs) and/or doing installment sales to grantor trusts.