With so much focus on the estate tax, the federal gift tax is often an overlooked topic of conversation. Here’s how it works:
Annual Exclusion
You’re allowed to make gifts of up to $13,000 per year, per recipient who is not your spouse. If you’re married and your spouse is a U.S. citizen, then there’s no limit to the value of gifts you can give him or her. (If you spouse is not a U.S. citizen, then you’re somewhat more limited.)
Each grantor has the right to give gifts, tax-free, up to the annual exclusion amount. So, as long as you report it to the IRS, you and your spouse can combine your Annual Exclusions and give up to $26,000 per recipient, tax-free, each year.
For example, if you have five children, you and your spouse can gift each of them up to $26,000 each year, gift-tax free.
Lifetime Exemption
If you give gifts to one person within a single year that exceed $13,000 in value, then you still may not have to pay tax on the gift. In addition to the $13,000 Annual Exclusion, there’s a $1 million Lifetime Exemption. So, even if you give more than $13,000 to one person within a year, the excess amount is absorbed by your $1 million Lifetime Exemption, until the exemption is used up.
For example, if you buy your niece a car valued at $23,000, the gift breaks down this way for tax purposes:
- The first $13,000 of the car’s value is covered by your Annual Exclusion.
- The remaining $10,000 of the car’s value is offset by your Lifetime Exemption.
So, you don’t owe gift tax on the transaction, and you have $990,000 of your Lifetime Exemption left.
If you’re concerned about paying gift tax, there are steps you can take to minimize your bill. An estate planning attorney can help you explore your options.
Stephen A. Mendel, Estate Planning Attorney
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