A client - a married couple - wants to help their daughter and her husband to buy a house. They can give a gift this year of $56,000 without tax consequences - if they write four checks. If they write one check, there could be gift tax consequences. Why?
Under Federal tax law, each person is allowed to give away up to $14,000 per year to as many people as they want – the “annual gift tax exclusion”. This can be done without tax consequences or tax returns.
Actually, each person is allowed to give more than that – in fact over your lifetime you are allowed to give away over $5.49 million without tax consequences. But when you are doing so, you have to keep a running tally with the IRS – by filing a gift tax return each year showing that you gave more than the annual exclusion amounts that year. At your death, your estate is entitled to the first $5.49 million – free of federal tax. You only pay the federal estate tax on the excess. (Ignoring state death taxes for another day.)
But that lifetime exemption amount of $5.49 million is reduced by reportable gifts made during your life. Whether you are giving it away now, or giving it away then, a running tally is kept, so that each person has the same $5.49 million exemption at death.
But the $14,000 per year gifts are not reportable – and so they do not eat into your lifetime exclusion amount. That’s the beauty of those gifts – there are no tax consequences or reporting requirements.
So, to avoid having to file a return for the proposed gift to the children to help with their house, the father and the mother each give the daughter and the son in law a check for $14,000. Four checks, each for the annual exclusion amount. In doing so, they qualify for the annual exclusion on all 4 gifts, and they don’t have to file a gift tax return. And they don’t eat into their lifetime exemption amounts.
Could you do with one check what you do with four - and argue with the IRS about whether in fact it is essentially the same transaction and result? If you like to argue with the IRS, and want to pay an attorney to do so, then you can choose the convenience of one check and then pay a lot of money to battle on principle. I think writing 4 checks is the easier option.