Gift Tax: Why Giving Away $15,000 Is a Trap For the Unwary

eligibility financial tax planning medicaid qualification pay for care smart planning 101 Jan 06, 2022

Have you ever heard that you can give away up to $15,000 per person per year to avoid gift tax? 

Spoiler alert: the government gives with one hand and takes away with the other.

Giving away money and things is actually a lot trickier than you may realize. There are so many times when somebody will come into my office, and they'll say something to me like, "Oh, but I know that you can give away 10,000 or 11,000 or 15,000 per person per year, and It'll be okay!". However, that statement is very problematic.

First, I want to explain what gifting is in the eyes of the law. "A gift is property, money, or assets that one person gives to another while receiving nothing or less than fair market value in return." That seems pretty simple, right? Where people get confused is when they give away certain things that may not seem like gifts.

For example, let's say you want to give your car to your grandchild. You sell it to them "for $1", but according to the vehicle's market value, it's worth $10,000. Legally, you have given them a gift of $9,999, and the fact that you thought you were being tricky by selling it for $1 doesn't negate the legality of the fair market value.

Tax rules say that you can give away $15,000 per person per year without owing any gift tax. That actually means that you can gift $15,000 per person per year before you have to report the gift to the IRS using IRS form 709. You would have to give away $11.7 million in your lifetime to owe any gift taxes to the government.

So, the idea that you can give away $15,000 before you owe gift taxes is entirely irrelevant for most people!

Here's the problem: When you apply for Medicaid benefits to help pay for long-term care, you will be penalized for gifting within the five years following up to the date of application. This means you won't be able to afford to pay for your long-term care because you decided to "gift" money to avoid taxes that you would have never had to pay.

Bottom line, I want you to think twice before you buy into the idea that you have to give away things to protect them or the idea of placing children or other people as owners on your assets to avoid probate. For most people, these are terrible pieces of advice.

I realize that I broadly covered some very complicated topics, and if you have a million questions or still feel that you need to "gift" to avoid gift taxes, I highly recommend that you seek proper legal and financial advice from somebody that can talk to all of these issues simultaneously. Get the right help from the right person.


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The information in this blog is not intended to be, nor should it be, construed as legal advice, and it is for informational purposes only. For advice specific to your situation, consult with a qualified attorney.

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