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gift tax

Q&A: “Superfunding” a 529 account requires filing gift tax returns

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Dear Liz: You wrote that people could contribute up to five times the annual gift tax exclusion to a 529 college savings plan without having to file a gift tax return. People can contribute that much without the gift reducing their lifetime gift and estate tax exemption amounts, but they must file annual gift tax returns to report the gift.

Answer: To recap, few people will ever have to pay gift taxes, but gifts over the annual exclusion amount (which is $19,000 in 2026) usually require filing a gift tax return. Gift taxes aren’t owed until the amounts in excess of the annual exclusion total more than the giver’s lifetime gift and estate tax exemption amount (which in 2026 is $15 million).

Generous givers can “superfund” a 529 college savings plan by contributing up to five years’ worth of annual exemption amounts at once. In 2026, that would be $95,000. To keep the gift from counting against your lifetime limit, however, you must file gift tax returns annually to indicate the gift is to be spread over multiple years.

It’s also important to know that any other gifts you make to the same beneficiary during the five-year period will reduce the allowance for 529 gifting. And if the giver dies during the five-year period, some of the gift will be added back into their estate.

There are other rules that apply to superfunding a 529, so anyone considering this option should discuss their situation with a tax pro and likely will want to consult an estate planning attorney as well.

Q&A: Giving your money away? The IRS wants to know about it.

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Dear Liz: You recently wrote that “the only givers who have to pay taxes are those who have given away millions in their lifetimes.” I tend to be generous with my offspring who are the beneficiaries of my trust. For example, I gave a down payment on a house to my son last year. Because of long-held rental property investments, my estate is probably close to the $13-million lifetime limit. Since lifetimes don’t expire until we die, and I plan to live to 120, does this mean that until I give away over $13 million in cash, I don’t have to report or pay taxes in any given year on gifts?

Answer: Not quite.

You have to file a gift tax return to report any gift over the annual limit, which in 2024 is $18,000 per recipient. Gifts don’t have to be in cash to be reportable. If you’d given your son a house instead of a down payment, you’d still need to file a gift tax return.

Reportable gifts are deducted from your lifetime gift and estate exemption, which is $13,610,000. Once you deplete that exemption, you would have to pay gift taxes on any gifts above the annual limits. Even if you don’t deplete the exemption, reportable gifts will reduce the amount of your estate that can avoid estate taxes. You’d be wise to get advice from an estate planning attorney about how to handle gifts.

Q&A: When giving cash gifts, does anyone need to pay taxes?

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Dear Liz: I am a widow age 95. I would like to give my three kids, who are in their 60s, $5,000 each this year. What are the taxes, and who pays them?

Answer: Gifts aren’t taxable to the recipients, and the only givers who have to pay taxes are those who have given away millions of dollars during their lifetimes.

Let’s start with the basics. You only have to file a gift tax return, which notifies the IRS of your generosity, when you give someone more than the annual exemption limit, which is $18,000 in 2024. So you could give your kids $54,000 before the end of the year and not have to tell the IRS.

You wouldn’t actually owe taxes on your gifts until the amounts you give away above that annual limit exceed your lifetime gift and estate limit, which is currently $13.61 million.

A taxable gift is typically deducted from the amount that avoids estate taxes at your death. But if you have enough money to worry about that, you should have an estate planning attorney who can advise you about how to proceed.

Q&A: My parents cut my kid out of their will. (Ouch!) Can I give her some cash?

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Dear Liz: My parents wrote my youngest daughter out of their will (my other children were left in). As both parents are now gone, I am in the process of settling the estate. I feel horrible that my parents did this. My daughter is very upset with me and her siblings for not sharing the inheritance. I am under the impression that there is nothing we can do about the will. Having said that, I would like to give my daughter a good amount of money but I believe I can’t give more than $18,000 a year. Am I correct in my two assumptions?

Answer: Yes and no.

Yes, as the executor of the estate, you’re bound to carry out your parents’ wishes as expressed in their estate planning documents.

But no, there’s no limit to how much money you can give someone. Gifts over a certain size — which is $18,000 this year — have to be reported to the IRS. But you won’t owe gift taxes until the amounts you give away over the annual limit exceed your lifetime limit, which is currently $13.61 million.

That said, a large enough gift could have an impact on your own estate. Consider getting advice from your estate planning attorney before you proceed.

Q&A: Understanding the gift tax

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Dear Liz: I am 83 and have always been employed and a regular saver. I find myself in the unusual position of having amassed a considerable estate and, barring a financial or medical catastrophe, probably having more assets than I will use in my lifetime. Of course these assets will pass to my wife or other heirs on my death, but I would like to help them now. I am considering passing on monies to my sons and grandchildren. I find it hard to believe, but is it correct that I can give up to a total of $15,000 per year ($30,000 for a husband and wife) to my children and grandchildren in a given calendar year without federal or state tax implications for either party? Also, does the recipient need to be a close relative for this transaction to take place without creating a tax liability for either entity?

Answer: Right now you can give away millions of dollars without owing gift taxes. Gifts are tax-free to the recipient, and there’s no requirement that they be a relative.

The annual gift exemption limit of $15,000 is how much you can give away per recipient without having to file a gift tax return. You and your wife together could give $30,000 to as many people as you wanted without having to file such a return. If you have two married sons who have three children each, you and your wife could give each family of five $150,000 or a total of $300,000 without having to file a gift tax return.

Gift taxes aren’t due until the amount you give away over the annual limit exceeds the lifetime gift and estate exemption limit, which currently is $11.7 million per person.

Given your age and affluence, you should be working with an experienced estate planning attorney to make sure your assets go where you want after your death. The attorney can discuss smart gifting strategies for your individual circumstances.

Friday’s need-to-know money news

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Today’s top story: Alter your buying habits in 2020 and keep the change. Also in the news: When the gift of giving brings a tax on receiving, student loan forgiveness and taxes, and 7 alternatives to costly payday loans.

Alter Your Buying Habits in 2020, and Keep the Change
Cutting back on impulse buying.

When the Gift of Giving Brings a Tax on Receiving
Understanding the gift tax.

Should You Worry About a ‘Student Loan Forgiveness Tax Bomb’?
Forgiveness comes at a price.

7 Alternatives to Costly Payday Loans
Avoiding astronomical interest rates.