If you’re thinking of giving a gift to a loved one, it’s crucial to be mindful of the various tax and legal considerations involved. Understanding how these factors could affect both you and the recipient is key before proceeding. To ensure you’re fully informed, consulting with both an attorney and an accountant is highly recommended. Here are some important points to keep in mind:
(1) Federal Gift Tax Exemption. As of January 1, 2025, you are able to make individual gifts of up to $19,000 in the calendar year (an increase from $18,000 in 2024) tax-free. In other words, giving more than $19,000 to any individual in 2025 means you may have to file a gift tax return. For a married couple filing jointly in 2025, the annual gift tax exclusion will be double that: $38,000.
(2) Estate Tax Exemption. The Federal Estate Tax Exemption did jump to $13,990,000 per individual in 2025, up from $13,610,000 million in 2024. A married couples’ exemption will be twice that, at $27,980,000 million. Over the course of your lifetime, you would therefore be able to give away up to $13,990,000 (as of 2025) before you owed a federal gift tax.
If the total worth of your estate falls below this amount, your estate will not owe federal estate taxes. It is important to note that at the end of 2025, the Tax Cuts and Jobs Act is set to sunset unless Congress takes action. When the Tax Cuts and Jobs Act expires, the federal estate and gift tax exemptions will return to what they were in 2017 (around $5 million, with an adjustment for inflation). To avoid this, lawmakers would have to alter the exclusion limit prior to December 31, 2025.
(3) Medicaid Five Year Look Back Period. Medicaid, unlike Medicare, is a means-based program, meaning eligibility depends on meeting asset and income limits. When applying for Medicaid, federal law requires Pennsylvania to review eligibility and, if certain assets were transferred or gifted for less than their value, assess a penalty period of ineligibility for those transfers or gifts. The five-year look-back period is the time frame in which the local County Assistance Office will review financial records to determine eligibility. The purpose of the look-back is to prevent individuals from gifting all of their assets and then immediately applying for government assistance for nursing home care. Any transfer can be scrutinized; however, generally only transfers over $500 are reviewed by the County Assistance Office. There is no exception for charitable giving or gifts to children or grandchildren. The penalty assessed applies to any gift over $500 that is not an exempt transfer, even if it is under the Federal Gift Tax annual exemption amount.
If assets have been transferred within the past five years and you plan to apply for Medicaid, consult with an attorney to determine if steps can be taken to avoid incurring a penalty.
(4) Pennsylvania Inheritance Tax. If the donor of a gift (the individual making the gift) passes away within one year of the gift being made, the gift will be subject to Pennsylvania inheritance tax. Pennsylvania permits a $3,000 exemption per calendar year, per recipient. However, any amount exceeding that exemption is subject to inheritance tax. The tax rate varies based on the relationship between the recipient and the giver of the gift. For instance, if the gift is from a parent to a child, the tax rate is 4.5%. If the gift is made to a sibling, the rate is 12%.
(5) Capital Gains Implications. Many people mistakenly believe that the recipient of a gift must pay income tax as a result of the gift. In reality, gifts are typically free from income tax for the recipient at the time they are received. However, gifting certain assets like stocks or mutual funds or real estate comes with potential tax consequences. If the recipient decides to sell the gifted asset, they may need to pay capital gains tax. When the asset is gifted, the donor’s tax basis for calculating capital gains transfers to the recipient. This means the recipient inherits the same capital gains tax implications as the donor would have faced if they had sold the asset.
Before in making any sizable gift, it is important to consult with your attorney and accountant to fully understand how the above rules apply to your situation.
The legal advice in this column is general in nature, consult your attorney for advice to fit your particular situation.
Rebecca A. Hobbs, Esquire is licensed to practice in the Commonwealth of Pennsylvania and is certified as an Elder Law Attorney by the National Elder Law Foundation as authorized by the Pennsylvania Supreme Court. She is a principal of the law firm of O’Donnell, Weiss & Mattei, P.C., 41 High Street, Pottstown, and 347 Bridge Street, Phoenixville,610-323-2800, www. owmlaw.com. You can reach Ms. Hobbs at rhobbs@owmlaw.com
Source: Berkshire mont
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