The 5 Million Dollar Gift Tax Exclusion

Did you know there is an annual federal gift tax exclusion AND a lifetime gift exemption, which was raised to $5.49 million in 2017? Gift taxes are often a confusing topic. Fortunately, it is not that difficult to explain. Here are a few common questions and answers about the gift tax.

  1. What is the gift tax? The gift tax is a potential financial obligation on the part of the giver of any gift.
  2. Who pays the gift tax? The giver pays the tax. The receiver does not.
  3. When does the gift tax apply? Gift taxes may apply when any asset is transferred to another without the full value of the item being paid in return. There are many situations where the gift tax may not apply. For example, medical or student expenses paid as a gift are exempt from the tax. Additionally, there are yearly and lifetime exclusions, and if the gifts are under these amounts, no tax will be owed. Finally, gifts to your spouse or a political organization are exempt.
  4. In 2011, the estate tax and gift tax exclusions were combined. Now, there is a lifetime limit of 5.49 million dollars, which can be gifted before the gift tax kicks in. This means that most people won’t have to worry about the gift tax, as this is quite a sizeable sum for much of the population.
  5. There is also an annual exemption. Any gifts you make that are under $14,000 annually will not count against your lifetime limit of $5.49 million. You can spread gifts out to multiple individuals without going over your limit as well. Giving $12,000 each to 3 different people will not count against your lifetime limit since you’re under the allowable $14,000 per person, per year. However, a gift of $36,000 to one person would end up with a gift tax liability for $22,000.
  6. The $5.49 million estate tax exemption means that on your death, your estate will not be liable for federal or gift taxes as long as the combined worth of your estate + any gifts made over the $14000 annual limit is less than $5.49 million dollars.

So, if you are looking to give gifts, take full advantage of the $14,000 yearly exclusion. Spreading your gifts out so that each recipient receives less than $14,000 per calendar year means that your estate will have as little tax burden as possible when it is left to your heirs. Always consult a tax advisor for further information about tax related issues.

Contact me anytime with questions at [email protected].

Good Things to Know About Unpermitted Square Footage

Homeowners love to renovate and add on to their homes. However, occasionally homeowners will add square footage to their house without securing the proper permitting and paperwork. As a home buyer, you need to be aware of how to check for unpermitted square footage, and what it could mean about the property. Here are a few things to look for.

  1. Does the square footage on the (online) listing match the footage listed on tax records? Local governments should have square footage information on file. While a small footage discrepancy is quite common, if the difference is hundreds of square feet, it is very likely that the house has had unpermitted additions – like garages and decks. Checking local records will help you to get the correct information about a property.
  2. Unpermitted square footage can bring a number of headaches. The most obvious one is that the work performed may have been inferior. Experienced contractors will always ensure that work is done according to proper building codes. If the work was not permitted, there is a real chance that it was done by an amateur or under qualified contractor. Additionally, once the city becomes aware that there is unpermitted work on any give property, inspectors may be required to come by and examine the work. Often these inspectors will be required to remove drywall and partially demolish an area to perform the inspection. This can be big hassle and an expensive one!
  3. Finally, insurance claims could be denied if the insurance company becomes aware of unpermitted work. The insurance company can (gladly) argue that the inferior work is what caused the problem. For example, a fire caused by an electrical failure could be the result of substandard work that does not meet code. Making sure that your house is completely permitted is the best way to ensure that your insurance will fully cover what you are paying for.

So, as a home buyer, be on the alert for unpermitted square footage. If there are discrepancies between the square footage on record and the square footage quoted by the seller, start digging into the details. As always, do your homework and never buy a home with unpermitted square footage unprepared.