Tax Effects of Personal Gifts
There is a great deal of confusion about the tax effects of making personal gifts. Many believe that there is an income tax benefit associated with making gifts of up to $15,000 per year and that making gifts over that amount is something to avoid. Neither of these things is necessarily true. An understanding of gifting requires a basic understanding of the United States and Oregon transfer tax systems.
We can quickly dispose of the income tax issues. There is no income tax deduction allowed for gifts made (other than charitable gifts), and gifts received are not taxable. (There may be other considerations for gifts of appreciated and/or income producing property.)
The transfer tax system is a bit more involved but here are some basics:
- US citizens and residents are allowed to transfer via lifetime gifts and death up to the “estate and gift tax applicable exclusion amount” (EGTAE) which is currently $11,400,000. That amount is adjusted annually for inflation and is of course subject to legislative change. Taxable estates in excess of that amount are subject to federal estate tax.
- One is allowed to gift up to “gift tax annual exclusion amount” (GTAE), currently $15,000, without using any of their EGTAE.
- The state of Oregon does not impose a gift tax but imposes a tax on decedents’ estates exceeding $1,000,000.
Example: Sasha, a single person, makes a $300,000 gift to her daughter in 2019 to buy a house. This is the first time she has made a gift exceeding the GTAE. Only $285,000 of that gift reduces her EGTAE, leaving her with $11,115,000. Sasha dies later in 2019 with $3,000,000 in her estate. Sasha’s combined lifetime and testamentary tax transfers are $3,285,000. Since this is far less than the total EFTAE of $11,400,000, she has no federal taxable estate nor is her executor required to file a federal estate tax return. Oregon doesn’t impose a gift tax, but Sasha’s executor will be required to file an Oregon estate tax return and pay estate tax to the extent her taxable estate exceeds $1,000,000.
Iteration – Sasha is worth $20,000,000 when she wants to make the $300,000 gift. At a minimum, she should consider making the gift over two years thus benefiting from an extra $15,000 GTAE.
Both the federal and Oregon estate and gift tax rules are complicated and intricate. There are many caveats we have not covered in this article, particularly as they relate to married individuals. Also, one might be well below the EGTAE but then win the lottery or receive a sizable inheritance. If you are considering making large gifts, you should contact your attorney or accountant.