Welcome to The Retirement Tax Podcast, where hosts Steven Jarvis, CPA, and Benjamin Brandt, CFP, work together to bridge the gap between tax professionals, financial advisors, and their mutual clients to help reduce most people’s largest expense in retirement: taxes. Each week, they will dive into conversations around taxes, focusing on what you can truly control (instead of what you cannot) and how to set yourself up financially for your future.
Like anything in life, taxes are just one piece of the puzzle. So today, Ben and Steven will be talking about some things that are not directly tax related, tackling the topic of gifting to family and some of the numbers involved, as well as tax rules that may come into play. You will get a solid framework to help handle the logistics so you’re prepared if/when taxes come into it.
Listen in as Steven and Ben discuss how giving often tends to happen within families and ways that you can start planning now to take full advantage of tax-free giving. They also discuss the importance of documenting gifts and various forms that will help in certain gifting situations. You will learn some great strategies that maximize your giving powers and will ensure that your gifts are gifts.
What You’ll Learn In Today’s Episode:
- How much you can give without having to pay taxes.
- Giving with warm hands vs. cold hands.
- Why it’s a good idea to keep a record of gifts (even if they are under the taxable amount).
- What portability is and how it works.
- Why tax documents don’t always set you up for success.
- When you may want to reach out for assistance.
Ideas Worth Sharing:
“If you want to give, you can do that over your lifetime and don’t have to wait until someone passes away.” – Steven Jarvis
“Make sure that this is in writing so everyone is really clear on what this really means.” – Steven Jarvis
“When some of these one-off things come up on your taxes, you want someone on your team who has done this dozens and dozens of times.” – Benjamin Brandt
Resources In Today’s Episode:
- Connect with Benjamin Brandt: LinkedIn
- Connect with Steven Jarvis: LinkedIn
- The HSA Tax Trifecta, Ep. 23
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Read the Transcript Below:
Matthew Jarvis: Welcome back to The Retirement Tax Podcast. I am one of your hosts, Steven Jarvis, and with me as always, is the illustrious Benjamin Brandt. Ben, welcome back. How are you?
Benjamin Brandt: Happy to be here. Always look forward to our recording sessions, and I can’t wait to deliver massive tax value to our listeners today.
Matthew Jarvis: That’s right, massive tax value. Now, today’s topic definitely comes up a lot with taxes, but we’re going to talk about a few things that aren’t directly tax-related, just because like anything in life, taxes is just one piece of the puzzle.
Even though I’m the tax guy and the CPA here on the podcast, I fully embrace that taxes are passenger on the bus and not the driver.
So, with all that said, what we want to talk about today is gifting to family. We want to make sure that we’re really specific, we’re talking about to family and not to charity because of course, the tax rules are all different.
And we’ll talk about some of the numbers involved in some of the tax rules. But Ben, we also want to just kind of put a framework around this of how we think about gifting to family and some of the logistics, because for most people, taxes really aren’t going to come into it, but we got to make sure we know where this can go wrong, and what we need to do to keep our ducks in a row.
Benjamin Brandt: Yeah, and if we’re spending our time listening to retirement podcast and tax podcasts, there’s a pretty good chance that we’ve been good fiduciaries of what we’ve been given financially. And there’s a pretty good chance we’re not going to end up being able to spend all of it over our lifetime.
So, it would only make sense that we’re going to pass that on to the next generation, whether that be kids, grandkids, nieces, nephews, what have you. So, we want to make sure that if that’s one of your goals to keep that money in the family and gift that with warm hands, not cold hands, as they often say — we want to make sure we’re doing that by the rules and we’re not getting our hand caught in the cookie jar with the IRS. So, let’s talk about it.
Matthew Jarvis: Yeah. So, the first question that usually comes up is, “Okay, well, how much can I give to my kids or whoever it is? How much can I give without having to pay taxes?”
And a lot of times, this gets lumped in with how much can I give without reporting it to the IRS, but those are actually two completely different questions. Maybe not completely different, but they’re really separate evaluations because let’s start with how much we can gift to our family.
So, at the federal level, based on current law, each taxpayer over their lifetime can gift up to 12.06 million. 12 million 60,000 I guess is how that works out.
That’s a big number for most people. Kind of almost seems like an unattainable number. And for married people, each taxpayer gets that. So, potentially, up to $24.12 million over their lifetime that they can gift without paying any federal taxes.
So, it’s a big number. Most likely, if you’re giving gifts, I really like how you phrase that benefit, of let’s give with warm hands and not cold hands. We can use that over our lifetime. We don’t have to wait until someone passes away to give to our family and still be able to avoid paying taxes.
Where we going to make sure we stay on track with the IRS and don’t get in trouble for how we’re reporting things, is when we look at the annual gifting limits. And those annual gifting limits, if we stay under those, we actually don’t even have to report it to the IRS. And so, there’s a separate form you fill out if you’re gifting more than the annual limit, it’s IRS form 709.
But that limit also, it is I think rather generous for most of us as far as what we can do before we have to file with the IRS, because for each taxpayer and each recipient, the annual limit right now is $16,000.
And I make that clarification of each taxpayer and each recipient because we can start kind of drawing these webs of how this can go, because if we have … so, if it’s just me giving to my son $16,000, but if I’m married and now, there’s two taxpayers giving to my son, now it’s 32,000 because each of us can give that 16,000.
And then for every kid, we add to that equation, we can keep adding for my wife and I both, we can keep adding that $16,000 for each of us each year. So, that number can get significant really quickly as far as how much we can give without reporting to the IRS. But there’s some other things we want to think about in there. And so, Ben, how do you typically talk to clients about this when they’re looking at gifting to family?
Benjamin Brandt: Well, I think this is a strategy that can be overlooked, I think because you think about the entirety of your net worth and the entirety of what potentially is taxable upon your death. And you think 16,000, well, that’s not a number to sniff at; how am I going to reduce the size of my taxable estate? Or how am I going to reduce the size of my retirement tax $16,000 at a time?
Doesn’t seem that significant. But when we think about, oftentimes we’re talking about a married retired couple, and we’re talking about children who are often also married; it can add up pretty quickly.
We can do, I can give my son 16,000, my wife can give my son 16,000. If he is married, I can give that spouse 16,000, my wife can give that spouse … so, we’re quickly talking about 50, 60 potentially, or more thousand dollars every single year.
So, while 16,000 might not seem significant, if we do this in a way that’s appropriate, we can actually add up pretty quickly, especially if you have multiple kids, and if they’re married as well.
And it doesn’t have to be kids, you can actually write a cheque to Steven and I for 16,000 and it doesn’t have to be a relation. You can give money to anybody. It’s just most commonly people that you’re related to; nieces and nephews maybe if you don’t have kids, giving with warm hands.
But where I see this potentially run a foul is we kind of hit fast-forward and we go to the end, and we say, “Okay, I’ve done the math, and I know I can give $64,000 because my son is married and I just write a check for 64,000, Merry Christmas and we never talk about it again.”
Well, we kind of skipped a few steps there — that could pinch us if the IRS, six and a half years from now, comes back and says, “I heard you did some gifting and maybe you didn’t do it the right way.”
So, you actually do probably want to have some paperwork and you probably want to write four separate cheques, and then we take pictures of those and we store them in our Google drive, or our iCloud or whatever it is, or we file them with our tax return, just so that we have all of our eyes dotted in our lowercase Js, also dotted to do it the right way.
And if we don’t do it the right way, then we do have to go back and do the paperwork, even though filing that form with the IRS, if we never get to the 12 million, it’s still a good idea to … and you really should file a paperwork because we don’t know how rules might change, or if something is contested after the fact, maybe we’ve passed on since then, we really want to dot our Is and cross our Ts on this.
Matthew Jarvis: Yeah, you’re definitely better off over-documenting. It’s very unlikely that anyone listening to this podcast is going to end up in a situation where they’re getting audited by the IRS in general, but in the unlikely event that you are to be audited by the IRS, having that documentation either as the giver or the recipient.
So, if my parents, if they happen to be listening and want to write me a cheque for $32,000, I’ll gladly take it. But I also, would want some kind of acknowledgement, even if it’s just on the cheque that that is clearly a gift.
So, that in the unlikely event the IRS comes asking me questions about my income, and they say, “Hey, wait a second, you got this $32,000 came into your account and you didn’t pay taxes on it, we want our share of that.”
Having that documentation instead of having to do my best to convince them that it was a gift and not income can help. And so, again, very unlikely, you end up in that situation, but why not have it?
Benjamin Brandt: Well, there’s also sibling concerns, too. Your mom, Steven, could write your check for 16,000 and not write it’s a gift, and then she passes away the next month, and your sister is the executive of the estate, and she’ll say, “Steven, you never paid mom back that $16,000 loan she gave you last year.”
Matthew Jarvis: Great point.
Benjamin Brandt: So, it’s really good to document these things because we don’t know how a different set of eyes might interpret this transaction.
Matthew Jarvis: Yeah, it’s a great point. I worked with a taxpayer recently who reached out because family member wanted to gift them a portion of an interest in a family business. And the taxpayer reached out to say, “Hey, do I need to pay taxes on this business ownership?”
And it was a little bit more complicated because a portion of it was going to get gifted and a portion of it, they were buying into. And so, especially when we start having these different moving pieces, and Ben, that’s a great point with family, at different times, people might interpret it differently.
And so, that was one of my recommendations to this taxpayer, was make sure that this is in writing from the person giving it — everyone’s real clear on what this really means, so that whether it’s the IRS ask questions, a family member that asks questions, that everyone’s really clear no, here’s what we said this was, so we know from a tax perspective and hopefully, from a preserving family relationship standpoint as well.
Benjamin Brandt: Both equally important
Matthew Jarvis: Yeah, yeah. Both can be potentially very awkward conversations.
Benjamin Brandt: Although, I’d rather owe money to a sibling than the IRS, but still paperwork is good in both cases.
Matthew Jarvis: That’s true. That’s true. Yeah, I might have to think about which one I’d rather owe money to, but we’ll leave that for a different day.
So, on this topic of gifting, we mentioned already that the annual or the lifetime exemption at the federal level is very, very high; for a married couple at this point, potentially up to over $24 million.
Now, for a lot of us, that’s not going to ever probably be an issue. But Ben, mentioned earlier that the rules can change. And one of the things that’s important to remember about that 24 million number I throw out, is that it’s actually 12 million for each taxpayer. And the ability for one of the spouses to use both exemptions is called portability, but that portability doesn’t happen automatically.
So, whether it’s because you think you could get close to that $12 million number, or kind of the winds of Congress start changing in that number, it seems like it’s going to go down — there’s an IRS form that you have to fill out when someone passes away to claim their exemption, it’s form 706.
Some people will remember it as six feet under. But form 706 is what has to be filed when someone passes away to claim that other exemption. And it’s a pretty short form, it doesn’t take very long to fill out, and you can kind of look at this as insurance against Congress’ winds of it’s not going to hurt anything to fill this out when someone passes away.
And so, while we don’t love talking about what happens at the end of life, that’s part of why we plan ahead, and this is something that should be on that year of death checklist for us of ,is this something we should consider?
Benjamin Brandt: And what sort of things are we accounting for on that form 706? Are we accounting for previous years’ gifts? Or what do we need to have prepared if we’re going to fill out that form?
Matthew Jarvis: Yeah. So, like most IRS forms, you obviously need kind of basic data of who’s this for, the social security number, some of that, so we’re identifying the right person. But yes, we’re also going to take into consideration any gifts that have been given up to that point.
And so, it’s really a pretty basic form if we’ve been … the only way that that’s going to be less than the full amount of that exemption, is if we have been giving more than that annual limit in the past. And so, we would have it’s IRS form 709 is the annual reporting one for gifts, and then 706 is in the year of death. But yeah, that’s great information to have.
Benjamin Brandt: Okay. So, if we’re structuring this in an de minimis way, where we’re giving out $10,000 at Christmas or whatever, that doesn’t need to go in this form.
If we’ve done helping someone buy a house and it’s been a significantly higher amount than the annual gifting amount, then we would’ve filled out the above and beyond form, and then that gets sort of itemized in this form at death.
So, the small gifts don’t apply, this is accounting for the bigger gifts, so that we don’t get maybe double-counted upon the second spouse’s death.
Matthew Jarvis: That’s correct, yep.
Benjamin Brandt: Got it. So, we’re just marking our placeholder and saying, “Yeah, we did take advantage of this.”
Matthew Jarvis: Yeah. And you mentioned gifting potentially for like the purchase of a home. There are times where a life event might happen that you want to gift more than that annual limit all at once.
You might see headlines or hear of other kind of strategies around how you might get more into a single year of gifting through loans to family members, some different things like that. These are definitely things you can do.
There’s some nuance to it that usually goes beyond what the headline reads. And so, if you find yourself in a situation where you think that giving that lumpsum of money all at once is going to be important, and you want to make sure you’re still falling under those gifting limits, that’s probably a point where you want to make sure you’re reaching out to a tax professional financial advisor, say, “Hey, did we get this structure right? Are we dotting our Is and our lower case Js …” I think is what you said before; making sure we really got ourselves dialed in.
Even if you’re going to after that go back to preparing a tax return yourself or whatever it might be, that’s probably one of those things that should be on the list of maybe this is a good time to reach out and ask some extra questions.
Benjamin Brandt: Excellent. Should we move on to our listener questions?
Matthew Jarvis: Let’s do it.
Benjamin Brandt: So, you’ve gotten on our shared document here; you recently heard from a taxpayer that they said, “How could I possibly have gotten that right?”
So, that’s definitely peaked my curiosity. I’d love to learn more about the conversation where a taxpayer said, “How could I have possibly gotten that right?”
Matthew Jarvis: Yeah. So, this is a little bit of an extension from the conversation we had on the last episode about tax documentation. So, definitely go back and listen to that if you haven’t had a chance.
But I was working with a taxpayer who, when they came to us, they had realized that … actually, a financial advisor they worked with had pointed out that there were some things that didn’t look quite right in their tax return so they referred them to us to help them kind of sort this all out.
And this taxpayer is a couple, if I remember right, engineer and a computer programmer. Very intelligent people had prided themselves on doing their own tax returns that we found a couple of years where their income had been significantly over-reported to the IRS.
So, we went through and prepared an amended return. They got a very large refund from that, but understandably, part of their question to me, as we’re going through this together is, “Well, how could we have possibly gotten this right? Aren’t we supposed to be able to do our own taxes? Like isn’t that supposed to be a thing?”
And I said, in theory, yes. Anyone is allowed to do their own taxes, but tax documents don’t always set us up as taxpayers for success. And again, as an extension of that conversation we were having, a couple of the issues that they were running into was form 1099-R having this box that says taxable amount not determined, checked.
That there’s really no descriptions. There isn’t a place for someone to leave comments that says, “Hey, you need to look at these three things and then go back and do a new calculation.” There’s no prompts, and so, they’d copied the amounts from the tax document into their tax return and it was ultimately wrong.
And so, the way I answered that question for them of how could I have possibly gotten this right? I said, unfortunately, in some of these situations, it comes down to being familiar with basically all the different things that can go wrong.
I said, you guys do this once a year for your own return, and honestly, you’ve been doing a great job until it got to this new level of complexity. Between me and my team, we do this hundreds of times every year. So, we’ve got the painful experience of knowing what some of these things that can go wrong are.
And that’s not necessarily to discourage people from doing their own taxes. There’s a lot of situations where that can make sense, but it’s important if you’re doing your own taxes to kind of have those things that you’re on the lookout for that make you take a step back and say, “Hey, is it time for me to ask some additional questions to maybe get some help?” And getting 1099s that say taxable amount not determined, that’s going to be one of those situations.
Having a gifting plan that’s going to put you over the annual limit for the first time, or if you’re looking at alternative ways of gifting that can help you stay under those limits, that’s going to be a time where you want to reach out and potentially ask for help, even if it’s only in that one year.
Benjamin Brandt: And don’t look at this as an assault on your ability to file your own taxes. When some of these one-off things come up, you want a professional that’s done this dozens of times. It’s reasonable to expect that you’re not good at this because you do this one time a year.
Now, again you’re filing your taxes, there’s probably been no errors up to this point, but these one-off things, you want somebody on your team that’s done this dozens and dozens of times. It’s brand new to you, it’s not brand new to them.
So, again, don’t take this as an assault on your abilities. You’ve been doing good up to this point, these one-off things sometimes, we need a little extra help.
Matthew Jarvis: One other thing that should be on that list that’s specific to gifting is if you move between states and you prepare your own taxes, that’s probably a good time to take a step back and decide, “Hey, is it time that we at least talk with a tax professional for this one year that we’ve been in transition?”
Because there’s so many differences between states on tax rules, including on gifting. We’ve been specifically talking about the federal lifetime exemption for gift tax, or for a state tax — the states are all different. We’ve got a dozen or so states that have their own rules that the exemptions go as low as a million dollars in Oregon and Massachusetts.
And when we talk about a million instead of 12 million, all of a sudden, that can apply to a lot more people that you’re potentially into a place where you are dealing with a state or gifting taxes.
So, that would be another one I’d put on the list. If you’ve prepared your own taxes and you move between states, that might be the right time to ask additional questions.
Benjamin Brandt: Even beyond gifting. There are some states that would potentially even try to claw back revenue if you moved right around midyear time and things like that. So, I’m glad you’re sitting down Steven, but there are some states that do actually need significant tax revenue.
So, they might be pretty aggressive in trying to get it from you, so we’ve got … well, when it’s appropriate, get a pro on your team and we’ll help you figure it out.
Matthew Jarvis: Yeah, that is a great reminder, Ben. It goes way beyond just gifting. There are so many nuance differences between the different states on how they tax things, what gets taxed, whether social security’s taxed, whether retirement distributions are taxed. There are definitely a lot of nuances to pay attention to there.
Ben, well, that covers what we wanted to touch on today. So, as always, thanks for jumping in and having a great conversation with me.
Benjamin Brandt: Always a blast.
Matthew Jarvis: And for all our listeners, until next time, remember don’t let the tax man hit you where the good Lord split you.
Hi everyone, quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only, and should not be taken as specific tax, investment, or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.