Tax Attic

Jerry Coon
Jerry Coon

“How much tax will I pay if I give, say $5,000, to my son/daughter/grandchild?” is one of the more common questions we receive during the year. This question is usually the start of an interesting conversation in which we get to ask more questions. For example, first, has the taxpayer given gifts to that child previously in the year? Second, is the taxpayer married and will the gift be a joint gift? Third, is the gift money or property? Fourth, is the taxpayer contemplating going into a nursing home and applying for Medicaid? Fifth, did the taxpayer fund a Section 529 Educational Savings Plan for that child within the past five years? Sixth, has the taxpayer filed a gift tax return previously? To fully explore the answers to our questions to the taxpayer, including the clients’ initial question to us, will take some time. Let’s go through the potential answers and discuss the situations.

First, has the taxpayer given gifts to that child previously in the year? That is important to know because there is an annual gift tax exclusion amount. In 2013, that amount is $14,000. A taxpayer can make a gift of up to $14,000 to anyone during the year without having to file a gift tax return. The gift tax exclusion amount was $13,000 in 2012. If the gift tax exclusion amount is exceeded, a Gift Tax Return, Form 709, must be filed. That form identifies to whom the gift was given; when the gift was given; and the amount of the gift. If the total annual gifts are less than the exclusion amount, no gift tax form must be filed. For purposes of determining whether to file Form 709, it’s important to know the total gifts given to that child during the year.

Second, if the taxpayer is married, each taxpayer’s gift tax exclusion amount is $14,000. The couple can give a total of $28,000 to any one person and still remain under the gift tax exclusion amount. The married taxpayers can write one check but they can make an election to split the check with each taking $14,000. A gift of $28,000 from mom and dad to a child covers most situations without having to file a Form 709. Incidentally, if the child is married, mom and dad could also give $28,000 to the daughter or son-in-law. A total gift of $56,000 per year per child and spouse allows substantial amounts of money to move from one generation to the next without even filing a gift tax return.

Third, is the gift in the form of property or is it money? This comes into play when parents want to divest some of their assets. They might want a special asset to stay in the family but the children don’t have access to the funds to buy the property. In these instances, we try to make sure the legal title bases are covered by referring the taxpayer to an attorney. With property, $14,000 of fair market value can be transferred per year. With a joint gift, the fair market value increases to $28,000. For example, parents own a condominium in Daytona Beach with a fair market value of $120,000. They want this condominium to go to one of their daughters with the other siblings being treated fairly in the will. Mom and dad could transfer $56,000 of ownership fair market value to the daughter and son-in-law in year one; another $56,000 in year two; and the remaining $8,000 in year three without having to file a Form 709. If the parents chose to put the entire condominium into the daughter and son-in-law’s name in year one, they would be required to file the Form 709.

Fourth, is the taxpayer contemplating applying for Medicaid in the near future? If the answer to this question is in the affirmative, we recommend the taxpayer make an appointment immediately with an estate attorney who can properly advise them of the ins and outs of making gifts at this time. The very complicated Medicaid laws and rules seem to be in a constant state of flux but this much seems to be true right now: gifts and other transfers of money made within five years of applying for medicaid are required to be drawn back into the taxpayer’s estate. The taxpayer must account for these gifted funds in the Medicaid application process. Be careful when selecting an attorney. There are substantial differences in the amounts charged so it might pay to interview more than one attorney before signing a contract.

Fifth, did the taxpayer fund a Section 529 Educational Savings Plan in the past five years? A special set of rules apply to Section 529 contributions. Taxpayers are allowed to give up to five times the $14,000 annual exclusion or $70,000, in one year. A Form 709 is required to be filed in the first year showing the beneficiaries and declaring that an election is being made to spread contributions ratably over the full five year period. If no further gifts are made, no Form 709 needs to be filed in years two through five. However, if the taxpayer fully funds the 529 plan at the $70,000 level, any additional gifts made to that person in the full five year period would result in the taxpayer having to file a Gift Tax return.

The final question is: has the taxpayer filed a gift tax return is a previous year? This is important because there are limits on lifetime gift amounts. Any taxable previous year gift amounts must be accounted for if a current year gift tax return must be filed. Next week, I will go through a few possible scenarios when filing a Form 709, Gift Tax return. In the meantime, I would like to congratulate all of the area high school students who will graduate next week. That is a tremendous milestone. Many of them will be going on to colleges and trade schools all over the USA and many others will begin their working career without any more schooling. Best of luck to each of the graduates as they start the post-high school portion of their lives! This is Jerry Coon signing off.



Jerry Coon is an Enrolled Agent and

a Registered Tax Return Preparer.

He owns Action Tax Service on

Northland Dr. in Rockford.

Contact Jerry through his website:

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