Michigan, like most states, does not have a state gift tax. However, the federal gift tax law in the Internal Revenue Code applies to everyone in all states, including Michigan. In any year, if you make gifts to relatives and friends, you may have to file a gift tax return and pay tax on the gifts. Many people wonder how to determine if they will owe 2016 gift taxes.
What is a “Gift” for Tax Purposes? Are All Gifts Taxable?
A gift is any permanent transfer of money or property to another person, when nothing of value is received in return. The total dollar amount of your gifts to each individual in any calendar year will determine whether you owe gift tax and whether you need to file a gift tax form.
There are some gifts that are exempt from taxes and do not require a gift tax return to be filed. They include:
- Gifts that total $14,000 or less to a specific individual. The exclusion applies to each person to whom a gift or gifts are made. This exemption is referred to as the “annual gift tax exclusion.” The exclusion is $14,000 for 2016 and 2017. The amount is occasionally increased to keep pace with inflation.
- Gifts to charities approved by the Internal Revenue Service (IRS).
- Gifts to a spouse who is a United States citizen. (The rules for a non-citizen spouse are discussed below.)
- Gifts that pay for another person’s tuition, as long as the tuition is paid directly to the educational institution.
- Gifts that pay for another person’s medical expenses, as long as the expenses are paid directly to the service provider.
Special Rules for Spouses Who Are Not U.S. Citizens
If your spouse is a U.S. citizen, you can make gifts to your spouse without any limit. Those gifts are completely tax-exempt. However, if your spouse is not a U.S. citizen, different rules apply.
For a non-citizen spouse, there is an annual exclusion. In 2016, the amount is $148,000. For gifts made in 2017, the amount will be $149,000. Gifts over the exclusion amount will be subject to tax and require a gift tax return to be filed.
When Do You Have to File a Gift Tax Return?
The person who makes the gift, referred to as the “donor,” is responsible for reporting non-exempt gifts and paying the tax on them. In any year, if you make any gifts that do not qualify under the exceptions, you are required to file Form 709, the U.S. Gift (and Generation-Skipping Transfer) Tax Return.
Like annual income tax forms, the gift tax form is due on April 15 of the year following the year in which the gift is made. However, gift tax forms are filed separately from income tax forms. Spouses cannot file joint gift tax forms. Each spouse must file separately.
Even if You Have to File a Gift Tax Return, You May Not Have to Pay Tax
You are required to file a return if you have any gifts that are over the annual exclusion or are not exempt for another reason. However, you may not have to pay the gift tax. Each person has a lifetime exclusion for gifts, called the Unified Tax Credit. The amount of the lifetime exclusion is $5.45 million for each person in 2016. The amount increases to $5.49 million in 2017.
When you submit a gift tax return, you may either pay the tax owed on the gift, or you may apply part of your lifetime credit to avoid paying the tax. However, if you use your Unified Tax Credit to pay gift taxes, your federal estate tax exclusion is reduced by that amount. That is because the Unified Tax Credit is a credit for both gift and estate taxes. Making the decision whether to pay the tax or use your lifetime credit is one that should be made as part of an overall annual gift plan and an estate plan.
Gifts Can Have Medicaid Implications for Seniors
If you are a senior and may be applying for Medicaid to cover nursing home costs in the foreseeable future, you need to be especially careful about making gifts. The federal gift tax exclusion does not extend to Medicaid eligibility determinations. Gifts in any amount made within five years preceding a Medicaid application can affect benefits. Read more about Medicaid and the benefits implications of gifts in an article “What Is Medicaid and How Can It Help You,” written by our elder law attorneys at Barron, Rosenberg, Mayoras & Mayoras, P.C.
Is Making Gifts a Good Idea?
Making annual gifts to family members during your lifetime can reduce estate taxes that may be due after you die as well as letting one see the smiles now. However, if you wish to consider making gifts, having a concrete annual plan can reduce the amount of gift taxes you pay. The plan should be developed in conjunction with your estate plan. Our estate planning attorneys are well-versed in all requirements of federal estate and gift law and will help you develop an annual gift plan and estate plan that best serve you and your family.
If you made gifts during 2016, and you are not sure if you need to file a return or pay tax, our attorneys will review your situation with you and determine what requirements apply and what options are available if you owe gift tax.
Call us at 248.641.7070 or complete our online form to set up your free consultation.