Reducing taxes can sometimes involve the gifting and transfer of assets (although it doesn’t reduce your taxes) to family or friends.  Numerous strategies for this are 1. Using the annual gift tax exclusion; 2. Using the lifetime exemption; 3. Making direct payments of medical or education expenses that qualify for the exclusion; 4. Contributing to a 529 qualified tuition plan or Coverdell Education Savings Account; 5. Transferring assets to a spouse; 6. Transferring assets to a charity.

Gifting is a common form of transferring taxable assets for most taxpayers among family and friends. An annual exclusion for gifts from the IRS taxability and reporting is below a threshold of $14,000 for 2016 and 2017. Therefore, you can gift up to $14,000 to another individual, of fair market value property without any reporting requirements in those years. If you and a spouse are gifting the balance then the value increases to $28,000, i.e. $14,000 per taxpayer. If you and your spouse gift to another couple, say a child and spouse, then the balance increases to $56,000, e.g. $14,000 per taxpayer to two individuals each. Gift in excess of $14,000 to an individual requires the filing of a federal gift tax Form 709 for IRS purposes. A gift is a transfer to an individual either directly or indirect where full consideration is not received in return.

Gifting of assets must be conventional, i.e. you can’t gift $10,000 to an individual for a free vehicle, so they can avoid taxable income; neither can you gift for payments of landscape or lawn work at your home a friendly vendors avoidance of income taxes, because in both instances you received consideration in return. Now, if your lawn work is worth $7,000 a year, and you pay $15,000, that additional $8,000 is a tax compliant gift for IRS purposes.

Common gifting of asset other than cash include business interests and property. In the tax court case Walter Price and Sandra Price, 99 TCM 1005 (2010), the tax courts held that shares in a family LCC did not constitute a present gift because it did not have an unrestricted and a noncontingent right to immediate use. Specifically there was no immediate enjoyment of the donated property because they could no withdraw their capital or sell the property without the consent of all other partners in the LLC. In the tax court case Fisher, the Fisher’s gift to their children could not be considered a gift because the interests were future and not present resulting from operating agreement language with restrictions on the children’s rights to property. Bottom line: work with both your CPA and attorney when making complex gifts.

Gifts in excess of $14,000 may or may not require a gift payment of cash if below the lifetime exemption limit of $5,450,000 for 2016 and $5,490,000 for 2017. Gifts applied to the estate exclusion require the filing of Form 706 United States Estate (Generation-Skipping Transfer) Tax Return. The Form 709 is applicable in larger estate planning strategies.

Exclusions for direct payment of medical or educational expense are applicable if payments are made directly to a doctor, hospital or university. Education expenses can be for tuition only, and not room and board or other educational related expenses. Therefore, grandparents can contribute towards a grandchild’s education for tuition only; with payment directly to the university, e.g. if tuition is $50,000 the grandparent can gift pay the expense tax free, but not the additional room and board or campus services. They will need to say the rice and tabasco are good… Thank you!

A gift to a charitable organization is as simple as writing a check, but if you donate property you may need a certified appraisal for validation of the of the value of the gift.

Summarized: This blog is not written to be tax advice or tax planning advice. It is for educational purposes only on understanding different applicable ways to gift relevant to your tax planning, and nuances of the tax codes that advise these decision be made after appropriate counsel. Before making any charitable gifts to family, friends, or charitable organizations, talk first with your CPA and estate attorney.