When it comes to annual estate planning, we must consider both estate taxes and gift taxes. In this article, we discuss gift taxes for 2017. You can learn more about the estate taxes for 2017 here(1).
2017 Annual Gift Tax Exclusion
The annual federal gift tax exclusion for 2017 has not changed from 2016 and remains $14,000. If a person makes gifts of $14,000 to 4 different people, none of the gifts are considered taxable by the federal government. Additionally, none of them have to be reported on a federal gift tax return.
In 2017, you can split gifts with your spouse so the two of you can leave a total of $28,000 to each person to whom you’d like to give money. However, if you split a gift with your spouse, you must report the split gift on Form 709 (federal gift tax return).
The annual exclusion for gifts to non-citizen spouses is not the same as the annual exclusion for gifts to U.S. citizen spouses. Gifts to citizen spouses qualify for the unlimited marital deduction so you can leave all your assets to your spouse tax free Gifts to non-citizen spouses do not qualify for the unlimited marital deduction. To compensate for the lack of a marital deduction for non-citizen spouses, the annual exclusion for gifts to non-citizen spouses is higher than the regular $14,000 annual exclusion. In 2017, the annual exclusion for gifts to non-citizen spouses is $149,000.
Lifetime Gift Tax Exclusion
In addition to the annual exclusion, each person also has a lifetime gift tax exclusion. In 2017, the lifetime gift tax exclusion is $5.49 million dollars. The lifetime gift tax exclusion is the total amount that can be given away by an individual over his or her entire lifetime to any number of people that will be free from gift taxes. If you give away any amount of your lifetime gift tax exclusion, then this amount will be subtracted from your estate tax exemption when you die. For example, if an individual makes taxable gifts (i.e. – gifts above the annual exclusion) of $3,000,000 over her lifetime and the individual dies in December 2017, then the individual's federal estate tax exemption will only be $2,490,000. In other words, $3,000,000 in lifetime gifts is subtracted from the 2017 federal estate tax exemption of $5,490,000, which only leaves $2,490,000 of the exemption.
Thus, by applying some of your lifetime gift tax exclusion, a gift with a value in excess of the $14,000 annual exclusion will result in no gift tax owed but you must file a Form 709 with the IRS. When you die, your estate tax exemption will be reduced by the amount of the gift over the annual exclusion.
The lifetime gift tax exclusion is the same for U.S. resident non-citizens and U.S. citizens. Thus, in 2017, you can make taxable gifts of up to $5,490,000 to a non-citizen above the annual exclusion and pay no gift tax. You will have to file a gift tax return, however.
The federal gift tax rate is 40% for the amount above the lifetime gift tax exclusion which means above $5,490,000 in 2017.
Connecticut Gift Tax Exclusion
Connecticut’s annual gift tax exclusion is the same as the federal government’s annual gift tax exclusion: $149,000 for non-citizen spouses and $14,000 for everyone else. Connecticut has a different lifetime gift tax exclusion, however. In 2017, the Connecticut lifetime gift tax exclusion is $2,000,000.
For example, if you are not married and you give $50,000 to each of your 2 children, you will have to file a Connecticut gift tax return even though no gift tax is payable. You will use up $72,000 of your lifetime Connecticut gift tax exclusion but owe no gift tax. It is calculated as follows: ($50,000 x 2) – ($14,000 x 2) = $72,000. You will need to file a Connecticut gift tax return (Form CT-706/709).
Federal and Connecticut gift tax returns are due by April 15 of the year following the gift.
If you need help preparing a gift tax return, you want an estate planning attorney to estimate the gift taxes owed, or you want an attorney to prepare a trust that uses your lifetime gift tax exclusion, please give our law firm a call at (860) 442-0150.