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gift taxes

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: An aunt left him out of her will. Can his siblings share the windfall?

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Dear Liz: My brother and I have received a cash inheritance from our aunt, as have our cousins, among a few others. Our youngest brother was excluded, as was our cousins’ youngest sibling. I believe my aunt, who was 96 when she died and in her 80s when her will was done, simply forgot these two as the family was spread out and contact was infrequent. My brother and I want to do the right thing for our younger brother and give him an equal share from our inheritance. I know most states don’t have inheritance taxes, but since he won’t technically be inheriting it I wonder if there are any other tax implications for us or him.

Answer: Whenever gift taxes are owed, which is rarely, they’re paid by the giver.

Dividing your inheritance with your brother would be a gift to him, so he would owe no taxes. You might have to file a gift tax return if the amount you give him is more than $19,000 (the current annual gift tax exclusion amount). But you wouldn’t owe gift taxes until the amount you give away over that annual limit exceeds your lifetime limit, which in 2025 is $13.99 million. The same is true for your other brother — a gift in excess of the $19,000-per-recipient annual exclusion would require filing a tax return, but probably not paying taxes.

Gifts in excess of the annual exclusion also reduce the amount you can pass free of estate taxes after your own death. If you’re a multimillionaire and likely to face these taxes, please consult an estate tax attorney.

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.

Who owes taxes after death?

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Dear Liz: My brother passed away, and for one of his bank accounts, he had named me as his beneficiary. Do I have to pay taxes on the $100,000 I received? Is it subject to a gift tax?

Answer: Estate taxes are paid by estates, not by inheritors, said estate attorney Burton A. Mitchell of Los Angeles firm Jeffer Mangels Butler & Mitchell. The vast majority of estates don’t owe taxes anyway, now that the estate tax exemption limit is over $5 million.

Some states have estate taxes with lower exemption limits, and a few have what are called “inheritance” taxes, which are levied based on the relationship of the heir to the deceased, Mitchell said. The more distant the relation, the higher the tax rate. Siblings typically face a higher rate than spouses or children. Ask the executor of your brother’s estate whether any of these taxes apply.

Gift taxes, meanwhile, are the responsibility of the giver and again aren’t an issue for the vast majority of people. Your brother would have had to give away more than $5 million in his lifetime for federal gift taxes to be an issue.

Your inheritance may, however, be subject to creditors’ claims if your brother didn’t leave enough money to satisfy his debts, Mitchell said. Check with the executor of his estate and consult an attorney if necessary.

Tax breaks for helping grandchildren

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Dear Liz: I am grandmother to two girls ages 10 and 14. I contribute to their Section 529 college funds and pay for expenses such as dental bills, dance lessons and so on. Is there a way I can deduct these contributions from my income tax?

Answer: Most states offer at least a partial tax deduction for 529 college plan contributions, said Mark Kantrowitz, publisher of the financial aid sites FinAid and FastWeb. The exceptions are California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Hampshire, New Jersey and Tennessee, which have state income taxes but no deduction; and Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, which don’t have state income taxes.

To get a deduction, you typically have to contribute to the plan offered by your home state rather than ones offered by other states. For more details, visit www.finaid.org/savings/state529deductions.phtml.

In general, you can’t take deductions for other expenses paid on behalf of your grandchildren. (If they’re your dependents — they live with you and you provide more than half their support — you could claim exemptions and possibly tax credits, but that doesn’t sound like the case here.) However, any medical or tuition expenses you pay directly on their behalf don’t count toward your annual gift tax exclusion, as discussed here last week.

Gift tax rules allow for plenty of giving

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Dear Liz: My husband and I have given our daughters gifts over the years, but we have never exceeded the $26,000 gift tax limit for a married couple. Do we need to file IRS Form 709 to split the gifts? If so, how to do we file for past years?

Answer: The gift tax system exists to help prevent wealthy people from transferring large amounts to their heirs during the donors’ lifetimes in an attempt to avoid estate taxes. Each person, however, is allowed to give a certain amount each year to any number of recipients.

The current gift tax exemption is $13,000. Each of you could give each of your daughters $13,000 annually. That means the two of you could give the two of them a total of $52,000 a year without having to file a gift tax return. Tuition or medical expenses you pay directly on behalf of another person do not count toward the limit.

The $13,000-per-recipient limit has been in place since Jan. 1, 2009. The limit was $12,000 from 2006 to 2008 and $11,000 from 2002 to 2005.

Only if donors give more than the annual exemption amount are they required to file gift tax returns. Even then, the givers typically don’t owe gift taxes. The lifetime gift tax exemption is currently $5.12 million. In other words, you would have to give away more than $5 million above and beyond the $13,000 per recipient limit to incur a tax. The lifetime limit is scheduled to fall back to $1 million in 2013, but it will still affect relatively few givers. If you did inadvertently exceed the annual limits, you can talk to a tax pro about filing the 709 form.