Gift Tax Q and A for Family Caregivers
Gifts can have a profound impact on the finances of both givers (donors) and receivers (donees).
Here are the answers to five common gift tax questions:
What is (and is not) a gift?
A gift is any transfer of real or personal property (e.g. money, house, car, jewelry, stock, etc.) from one person to another, made while the donor is still alive. To qualify as a gift, the property must be given by the donor without expectation of repayment by the donee.
Many people are surprised to find that the following transactions can also be considered "gifts" for tax purposes:
- A sale of property where the money received is less than the value of the property.
- Making an interest-free or below market interest rate loan.
- Forgiving a debt.
- Some kinds of property settlements in divorce proceedings.
- Surrendering a portion of an annuity to create a "survivor annuity"—an insurance product that makes regular monetary payments to the surviving holder of a policy, once the other holder has passed.
Typically, anything that can be encompassed by the above definition can be considered a gift, with a few exceptions:
- Donations made to charities or political organizations.
- Items given to a spouse.
- The payment of tuition or medical expenses for someone else, made directly to the medical institution or school.
In what circumstance does a gift tax return have to be filed, and who is responsible for paying?
As a general rule, the donor (or, if they are deceased, their estate's executor or administrator) is the one who pays the taxes on a gift. However, if the donor doesn't pay the tax, then the donee may be required to cover it.
A gift tax return must be filed by a donor if he or she gives more than $14,000 (the current annual exclusion amount) in gifts in a given year to a particular individual. When gifts greater than $14,000 are given to a particular individual in a single year, then any amount over $14,000 may be subject to taxation, and will reduce the giver's estate tax exemption—also known as the "lifetime gift tax exemption"—by however much the gift exceeded $14,000.
The current lifetime gift tax exemption is $5,340,000. Gift taxes are filed using Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return.
Couples who are filing a joint income tax return must still fill out their own, individual Form 709s, if they gave gifts in excess of $14,000 to a single person during the tax year. If a gift of a jointly-held property is made, then each spouse is considered to have contributed half of the value of the property. For example, if an older couple gives their adult son their house, worth $256,000, then each spouse must file a gift tax return for a $128,000 gift.
Only individuals, not entities, are responsible for filing a gift tax return. In the event that an estate, trust, partnership or corporation makes a qualifying gift, the individual men and women who are the beneficiaries, stockholders or partners may be required to file a gift tax return.
What is the difference between present interest and future interest?
The difference between present interest gifts and future interest gifts is important to keep in mind when considering what property can and cannot be counted as part of the annual exclusion amount.
A gift of present interest is one that immediately gives the donee the ability to possess and use it; for example, a gift of $10,000 in cash. A gift of future interest is one that gives the donee the ability to possess and use it at some future date; for example, the rights to property that is currently being held as part of the donor's estate—often referred to as a "remainder." Gifts of future interest cannot be counted as part of the annual exclusion and must be reported to the IRS, regardless of the amount.
How do gifts affect Medicaid eligibility?
Even if a gift is below the annual exclusion amount of $14,000, it may still be counted against the donor, should they attempt to qualify for Medicaid.
When a person applies for Medicaid assistance to help pay for their medical and long-term care expenses, the total value of their eligible assets is taken into account. If an applicant owns too much in countable assets, then they won't be able to receive Medicaid benefits.
Many families believe that a person can just give their money and other assets to family and friends in order to "spend down" their money for Medicaid. However, due to the five-year Medicaid look-back period, any gift made by an applicant during the five years leading up to the time when they want to qualify for government assistance will delay their ability to receive financial aid.
For instance, say your mother gives you her jewelry collection—worth $20,000—for free, rather than selling it on the open market. If the exchange occurred within five years of her applying for Medicaid, then the government would still consider her to be in possession of that $20,000 asset amount, even though she no longer owns the jewelry. They will divide that $20,000 by the monthly cost of a nursing home in the area (say, $5,000) and delay her financial assistance by that amount of time; in this case, four months.
Exceptions to this rule include items that are not counted as assets by Medicaid—any cash less than $2,000, a house (worth less than $500,000 or $750,000, depending on the state), a car, money used to plan a funeral or burial (up to $1,500), the cash value of a life insurance policy owned by the applicant, and real or personal property that is essential for life support (including income-generating rental property and real estate).
If a parent pays an adult child to take care of them, is that considered a gift?
It depends. The parent could count the money they give to their adult child in exchange for caregiving services as a gift, meaning that any amount over the $14,000 threshold would be subject to the gift tax. Or, as long as the child is over 21 years old, the parent could consider their offspring an "employee," a distinction that would transform any payment made to the adult child for caregiving services into earned income. In this instance, the parent would be considered a household employer and would have to follow the requisite tax rules for "household employers," which include reporting the "employee's" wages to the Social Security Administration via a Form W2, and filing a Schedule H along with their personal income tax return.
For their part, the adult child would have to report the money received from their parents as earned income and report it on their personal income tax return. For more information on the financial consequences of being a household employer, see How Hiring an In-Home Caregiver Can Affect Taxes.