Dear Tax Talk,
I am a widowed 82-year-old male. I sold my rental property and had a gain of $50,000. Can I gift $14,000 each to my three children to reduce my capital gains tax?
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There is no deduction on your Form 1040 for gifting $14,000 to your three children, so this tactic will not help reduce the capital gains taxes owed on the sale of the rental property.
Your question is not uncommon, and I hope to help clear up the confusion on this matter.
So, why do people gift money to children and other family members, and what does it have to do with reducing taxes?
First, let’s be clear that we are not talking about gifts to qualified charitable organizations, as there is a tax deduction for charitable gifts if you itemize your deductions on Schedule A.
Rather, we are talking about making a gift to family members or anyone else. Since 2013, the annual gift tax exclusion — the amount you can give away with no tax repercussions — has been $14,000. That means you can give away that amount to as many people as you please and still fly under the IRS radar.
Where gifting $14K can make a difference
This strategy can minimize estate taxes for wealthy people when they die.
The estate tax — separate from income tax — is really a tax on your right to transfer property when you die. However, it is important to know that for 2016 an estate tax return is required only when your combined gross assets and prior taxable gifts exceed $5.45 million. For 2017, the threshold is $5.49 million. So, as you can see, most estates do not have to file a return.
But what about the $14,000 annual gift exclusion amount? If you give a gift of more than $14,000 per person per year, then you have to file Form 709, United States Gift Tax Return, to report this to the IRS. The gift is not deductible on your Form 1040 and the recipient does not have to report it as income.
The end result is that many people want to make a gift, but they don’t want to complete Form 709, so they do not exceed the $14,000 maximum excludable amount the IRS allows.
In the meantime, I recommend that you consider sitting down with a qualified tax professional to review the tax owed on the sale of the property and also take a look at what other options you may have to reduce your taxes since I do not have enough information on your entire financial situation to help you.
Thanks for the great question, and all the best to you.
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