Let the taxpayer beware: the recently proposed “For the 99.5 Percent Act” introduced by Senators Bernie Sanders and Sheldon Whitehouse would radically limit the ability of parents or grandparents to make annual exclusion gifts for their families.
Under present law, $15,000 per donee is excluded from taxable gifts. Gifts that are excluded do not count toward an individual’s lifetime exemption from gift or estate taxes. Gifts of $15,000 may be made to any one or more recipients, and married couples can effectively gift $30,000 to any person through the concept of gift splitting. For instance, a married couple with eight children could give $30,000 to each of their children in a single year transferring $240,000 of their estate without gift or estate tax implications.
If enacted, under the proposed law’s new annual exclusion, an individual could make excluded gifts up to $10,000 and married couples could make excluded gifts up to $20,000. While at first glance this change is bad enough, there is an additional limitation. The total annual excludable gifts are capped at $20,000 per donor. Under the proposed law, for a married couple, the cap is at $40,000. Thus, a single parent could make $10,000 gifts to only two children. A married couple could make gifts of up to $20,000 to only two children. If the family had five children, total annual exclusion gifts would still be limited to $20,000 per donor. Once a taxable gift in excess of the annual exclusion amount is made, it counts toward the lifetime gift and estate tax exemption amount and requires filing of the federal IRS Form 709 United States Gift (and Generation –Skipping Transfer) Tax Return.
While current law exempts what many argue is a too large $11.7 million from an individual’s taxable estate and from gifts made during one’s lifetime, the proposed law drastically lowers these exemptions. The “For the 99.5 Percent Act” would only exempt $3.5 million from estate tax. It provides an even lower exemption still for lifetime gifts of only $1 million. Not surprisingly the tax rate under the proposed law is to be increased from the current 40% rate and is proposed to reach as high as 65% for very large gifts. Fortunately, the proposed law leaves unchanged the exclusions for qualified payments of tuition paid to an educational institution and for medical care, which many parents rely upon to help their children.
Under the “For the 99.5 Percent Act,” even small gifts, such as holiday gifts for a larger family, would likely to result in taxable gifts and the filing of annual gift tax returns. This is a drastic change to present law. It is likely to catch many donors who now have no reporting requirements or concerns about eventually having to pay gift or estate tax. Hopefully, Congress will modify this gifting limit before it becomes law.