Anyone who has seen the movie Shawshank Redemption knows that taxes actually play a fairly big role. The main character, Andy Dufresne, was a successful banker prior to being at Shawshank and was experienced in the tax field. A pivotal point in the movie, Andy overhears a guard, Capt. Hadley, talking about receiving an inheritance from a deceased brother and griping about having to pay taxes on the income. Andy suggests gifting the income to his wife and avoid having to pay significant taxes on the money. It seems like a fantastic way to receive money and not be liable to pay taxes, but is it true? With the upcoming tax deadline, people everywhere are finding receipts and filing taxes in hopes of getting a big tax return. Financial planning can be complicated and overwhelming, but with the help of a financial consultant, you can be sure to file your taxes properly, even gifts that you have received.

IRS Publication 950

This document explains the rules regarding when taxes are owed for estate or gifts. It provides information on how much money or property can be given in a lifetime before any tax will be owed.

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Tax and Gifts

When giving a gift, generally they are not subject to a gift tax. Similarly, an estate that is gifted is also not subject to taxation. However, don’t try to claim a bonus from your employer as a gift, to qualify as a gift and be tax-free, the money needs to come from a family member. Also, lottery or gambling winnings do not count as a gift and will require taxes to be paid.

financial consultantsGift Tax

For the giver of the gift, however, the money given is subject to the Gift and Estate Tax rules. This requires the giver of the gift to pay taxes. This is good news for the Capt. Hadley’s wife, but he will still need to pay a percentage of the gift in taxes. There are some exemptions that could allow the gift to be tax-free.

Annual Gift Tax Exclusion

Capt. Hadley is allowed to give up to $14,000, per person, per year. This amount, but not above, is not required to be reported to the IRS. In the Shawshank Redemption example, Capt. Hadley can gift his wife $14,000 and if he has children, $14,000 to each of them and these gifts will be tax-free. As long as no one person receives more than the $14,000.

Marital Deduction

When a couple is legally married, the spouses can gift each other an unlimited amount of gifts and they will be 100 percent tax-free. In California, however, it is required that the couple is legally married. The state does not recognize common-law marriages.

Charitable Gifts

If Capt. Hadley chooses to give away his inheritance to a charitable foundation, the gift will be tax-free.

Inflation

Shawshank Redemption took place in the 1940s and early 1950’s; the tax exclusion amount is adjusted annually for inflation, so the $14,000 that is allowed today, may not have been the same during the 1940s. Either way, Andy’s advice has some validity to it. Gifts up to $14,000  given can be without being required to pay taxes.

Whether you are getting ready to file taxes or planning for retirement, what you do with your estate or gifts can have a big impact on your finances. If you are planning on giving a wedding gift or graduation gift this spring or summer, be sure to know the tax rules. If needed, consult with a financial consultant who can guide you through any challenging financial planning situation. Our advisors have the experience and knowledge that will give you peace of mind when dealing with your hard earned money. Don’t let a gift and potential taxes get in the way of your retirement planning. Call a financial consultant at KNR Consulting today.