Gifts for the People – Proposed Drastic Changes to Federal Gift Tax Law | Ulmer & Bern LLP
Taxpayer beware: The recent “For the 99.5 Percent Act” proposal introduced by Senators Bernie Sanders and Sheldon Whitehouse would drastically limit the ability of parents or grandparents to make annual opt-out gifts to their families.
Under current law, $15,000 per donee is excluded from taxable donations. Gifts that are excluded do not count towards an individual’s lifetime exemption from gift or inheritance tax. Gifts of $15,000 can be made to one or more recipients, and married couples can effectively gift $30,000 to anyone through the gift sharing concept. For example, a married couple with eight children could give $30,000 to each of their children in a single year by transferring $240,000 from their estate without affecting gifts or inheritance tax.
If enacted, under the proposed law‘s new annual exclusion, an individual could make excluded gifts of up to $10,000 and married couples could make excluded gifts of up to $20,000. Although at first glance this change is bad enough, there is an additional limitation. The annual total of exclusive gifts is capped at $20,000 per donor. Under the proposed law, for a married couple, the cap is $40,000. So a single parent could donate $10,000 to just two children. A married couple could donate up to $20,000 to just two children. If the family had five children, the total annual exclusion gifts would still be limited to $20,000 per donor. Once a taxable donation greater than the annual exclusion amount is made, it counts towards the lifetime gift and estate tax exemption amount and requires the filing of the federal IRS Form 709 tax return. United States Gift (and Generation – Skipping Transfer).
While the current law exempts what many consider to be an excessively large $11.7 million of an individual’s taxable estate and gifts made during their lifetime, the proposed law significantly reduces those exemptions. The “For the 99.5 Percent Act” would only exempt $3.5 million from estate tax. It provides an even lower exemption for lifetime donations of just $1 million. Not surprisingly, the tax rate under the proposed law will be increased from the current rate of 40% and proposed to be increased to 65% for very large donations. Fortunately, the bill leaves unchanged the exclusions for qualified tuition payments to an educational institution and for medical care, which many parents rely on to support their children.
Under the “99.5% law,” even small gifts, such as holiday gifts for a larger family, would likely result in taxable gifts and the filing of annual tax returns. This is a radical change from the current law. It is likely to catch many donors who no longer have reporting requirements or are concerned about possibly having to pay gift or inheritance tax. Hopefully Congress will change this donation limit before it becomes law.