I was walking around the gym the other day, minding my own business, when I heard a Rick Ross lyric that is worth a short bit of explanation, as it will likely be instructive.
“Deposit a hundred stacks, break up, won’t take it out. Baby that’s a gift.”
The Annual Exclusion
Yes Rick, that’s a gift. And it happens to be over the annual gift tax exclusion amount. So what is the annual gift tax exclusion? It essentially means that you or I can gift $14K* to anybody (and as many people as we like) each year and the IRS doesn’t care at all.
However, if you gift over $14K, you have to report it on what’s called a gift tax return (street name, ‘709’). You keep track of it every year forever and add new amounts to it. Now this is where people get tripped up. Many people think that taxes now have to be paid, and often that the person receiving the gift has to pay them. Wrong on both counts. A person also has a lifetime gift tax exemption. What does that mean? Simple. You can report that much gifting on your form 709 before you have to pay taxes. What’s the exemption today? $5,490,000.*
Crunching the Numbers
Let’s do some math. Each time Rick gives $100K to a young lady, he has to report $86K on his form 709 for that year (don’t forget the $14K exclusion). $5,490,000 divided by $86,000 equals 63 times Rick can gift a hundred stacks to different ladies. The 64th lady is going to cost Ricky some gift tax. What’s the federal gift tax rate? 40%. So once the exemption is used up, he’d have to pay 40% of $86K (that’s $34.4K if you’re counting) to the Feds.
So Mr. Rosé, I hope you’ve been reporting these gifts to your accountant.
*The annual amount you can gift is now $15K and the lifetime exclusion doubled to about $11 million as of 2018.