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Estate Plan Edge: The IRS taxes every uncompensated transfer unless it fits a specific gift tax exception, or loophole. Here's a look at three loopholes.

October 31, 2016

4 Min Read

December. Christmas. Snow. Family gatherings. Gifts … ah, there’s an estate planning topic. Did you know that Christmas gifts have tax implications?

A gift is the transfer of ownership of something for which you don’t receive full compensation. I’m going to call it an “uncompensated transfer.” The IRS taxes every uncompensated transfer unless it fits a specific gift tax exception, or loophole. So that you won’t worry too much, your Christmas gifts probably fit one of these loopholes.


Let’s eliminate a gimmick upfront. It goes like this: “I won’t give my son that 20 acres. Instead, I’ll sell it to him for a dollar. Then it’s not an uncompensated transfer!” It would be nice if the law were so naïve, but it isn’t. Reality applies. The land has a fair market value, and it is more than $1. The difference between the actual value (say the 20 acres on the open market would bring $140,000) and the compensation received (the $1) is a gift ($139,999).

So, the real value of what is exchanged is what matters. If they are not equal, the difference is a gift. Put in any numbers you wish. Dad gives son the 20 acres and son pays $50,000? A $90,000 gift occurred. Under federal law, a gift is taxed at 40% of the value unless the gift fits one of the loopholes.

Annual exclusion loophole

The first loophole is commonly (and incorrectly) known as the “$10,000 gift exemption.” Today, this is actually the $14,000 annual gift tax exclusion. Our government still recognizes that we ought to be able to make some gifts without having to pay a tax. Therefore, the first $14,000 that you give any one person in any calendar year is excluded from gift taxation. You can make such gifts to as many people as you wish, and you don’t have to account to the government for it — no gift tax return required. Ordinary Christmas, birthday, anniversary and similar gifts thus escape tax. So long as you don’t do anything to get close to the annual limit, you can rest at ease.

But what if you want to give land or a larger amount of cash or stock to family members, maybe to reduce the value of your estate? Maybe you have 10 heirs to whom you could give that 20 acres, so each one would receive only a tenth of the $140,000 value. This would be a clumsy and inefficient way to reduce your estate, but it could qualify for the gift tax exclusion. To prove the value of the gift was not more than $14,000 per recipient, you need a legitimate appraisal of the property in your records.

Also, make sure you leave yourself room. If you make this large gift of exactly $14,000 per person and get audited, the auditor will ask: “Did you give any of these people any birthday or Christmas presents? Did you ever buy their lunch?” If you did, your annual gifts exceeded $14,000, and you should have filed a gift tax return.

Filing a return doesn’t mean paying tax

If your gifts exceed the annual exclusion, you must file a tax return, but that doesn’t mean you owe tax. There is another loophole. So long as you properly report the excess gifts, you won’t have to pay gift tax until the total amount of all such excess gifts made during your lifetime surpasses your lifetime gift tax exemption of $5,450,000. Most people know about this as an estate tax exemption, but it can also be used in whole or in part while you are living.

Back to Dad deeding the 20 acres to son, and son paying nothing. This is a $140,000 gift. Dad must file a gift tax return to report the gift. The first $14,000 would qualify for the annual exclusion (no tax due), and the next $126,000 would use that much of Dad’s lifetime $5,450,000 exemption. If the return was not filed, Dad could owe gift tax of 40% of the $126,000.

The gift tax return creates a record that Dad has used $126,000 of his lifetime gift and estate tax exemption. At his death, his estate tax exemption is reduced to $5,324,000.

Marital deduction gifts    

Since it is Christmas, we don’t want to miss the third loophole: gifts to your spouse. One of President Ronald Reagan’s notable achievements was to pass the unlimited marital deduction. Since the early 1980s, uncompensated transfers between spouses are tax-free — absolutely no limit.

So, gentlemen, there is no amount that is too much to spend on your wife this Christmas!

Ferguson owns The Estate Planning Center in Salem. Learn more at thefarmersestateplanningattorneys.com.

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