Gift Tax Annual Exclusion.
Most people know about the gift tax annual exclusion. For 2013, it is $14,000. It means that you (donor) can give $14,000 to anyone person (donee) in the year 2013. The donee can be anyone.
Using the gift tax annual exclusion, if you are married and your spouse consents, you and your spouse can give a gift of $28,000 ($14,000 from each of you) to any one person. Which means that if you make gifts to your child, and your child is married, you and your spouse can give to your child and your child’s spouse $56,000 this year! Even better, you and your spouse can make a gift of $56,000 before year end and make another gift of $56,000 at the beginning of the next year for a total of $112,000 being gifted to your child and your child’s spouse.
What is the gift tax annual exclusion an exclusion from?
- Gift tax. Any gifts qualifying for the gift tax annual exclusion are not subject to gift tax.
- Requirement to file gift tax return. If all gifts made during the year qualify for the gift tax annual exclusion, you, as the donor, are not required to file a gift tax return.
If I give more than the exclusion amount, won’t I have to pay gift tax?
This is the biggest misconception that we run into. Almost everyone that comes to our office believes that if they give more than the exclusion amount, they will have to pay gift tax on the excess. That is not true.
You do have to file a gift tax return. Then once you have made gifts in excess of $5 million (this amount is adjusted for inflation so for 2013 it is actually $5.25 million), your gifts will be subject to gift tax. I don’t know about you, but I have not made gifts of that magnitude!
Also, gifts that don’t qualify for the gift tax annual exclusion are counted against the $5.25 million (for 2013) in cumulative lifetime and post-mortem taxable transfers exempt from the gift tax and the estate tax.
What is the gift tax annual exclusion not an exclusion from?
The gift tax annual exclusion only excludes the gifts as stated above. It does not exclude the gifts from anything else. For example, for Medicaid (Title 19) purposes, a question on the application is whether there have been gifts (transfers without consideration) within the last 5 years. This is referred to as the 5-year look back rule. Just because a gift is excluded for gift tax purposes does not mean it is excluded from being counted as a transfer within the last 5 years. It will be counted.
Gift taxes are more complicated than people think. Get help if you need it!