Pop Quiz: Test Your Financial Literacy

Pop Quiz:

Your very generous parents give you the down payment to buy a house.  

Who pays the gift tax?

a) You
b) Your parents
c) Both of you
d) Neither of you

Did you answer a) You?  Congratulations!  You are in good company.  Unfortunately, you are also wrong.  Thanks for playing.

(Anecdotaly, I've never spoken to anyone except estate attorneys or very, very smart financial planners ;-) who understand how this works.  In fact, the inspiration for this blog came from 3 very smart people asking me about it recently.) 

The correct answer is b) your parents.   The person gifting money is the one who also pays the gift tax.  

How much will the gift tax be? 

a) 40%
b) 25%
c) 10%
d) 0%

The correct answer is: d) 0%….well, not technically.

Technically, you pay as much as 40%.   

HOWEVER, the federal government gives you a bucket of money - $5,490,000 to be exact - to pay your gift taxes.    Woohoo! 

Everyone has $5,490,000 to use towards paying gift tax.  If you give away more than that in your lifetime (lucky you), THEN you're paying for gift tax out of your pocket.

So a married couple has $10,980,000 to give away before they actually write a check to Uncle Sam.

Currently, that number is adjusted upward each year for inflation.  (I say "currently" because this number pretty much changes with every new presidential administration.)

"But wait," you say.  "I've heard that you can only give away $14,000 a year tax-free.  What about that, Rick?"

Tune in next week and I'll explain how the $14,000 per year fits in to all of this.  


Disclosure: This blog is for educational purposes only and should not be considered financial or legal advice.  These statements have been simplified to illustrate the concept.  Consult your Financial Planner or Estate Attorney for help with your specific situation.