Not every gift has to be reported to the IRS, nor does every gift trigger a tax; but it’s important to understand when the IRS needs to know about a gift. Here’s a brief summary of the situations in which the federal gift tax applies:
Who Receives the Gift, and How Much is it Worth?
For gift tax purposes, the IRS looks at gifts to a spouse differently than it does gifts to a non-spouse. Assuming your husband or wife is a United States citizen, the unlimited marital deduction applies, and you can transfer as much property to him or her as you’d like without triggering gift taxation. If your spouse is not a citizen, you’re a little more limited – you can give an annual total of $134,000 worth of property to a non-citizen spouse before triggering the federal gift tax.
If you’re gifting assets to anyone other than your husband or wife, the annual exemption is much lower. You can give up to $13,000 worth of gifts, per recipient, each year without having to file a gift tax return.
When Does the Recipient Get the Property?
The above rules only apply to gifts of a present interest, that is, outright gifts of money or other property where the recipient immediately gets full ownership, use, and control. However, there’s another type of gift which does not fall under any of the above exemptions: the gift of a future interest.
When you give a future interest in property, the recipient doesn’t receive the property up front. Instead, there’s a waiting period before complete ownership and control of the gifted property is transferred to the recipient. An example of a gift of a future interest would be where a father puts money in an irrevocable trust for his son, where the trust is to expire in ten years, with the son receiving all the trust property at that point. In this situation, a gift is made when the father transfers property to the trust, but the gift is one of a future interest, because the son doesn’t get the trust property for ten years.
When you give a gift of a future interest, the gift must be reported to the IRS in the year it is made, regardless of your relationship to the recipient or the value of the gift.
Keep in mind that, in addition to the unlimited marital exclusion and the $13,000 annual gift tax deduction, there’s also a lifetime gift tax exemption which, for this year and next year, is set at $5 million. For more information on gift taxes, you can talk to your estate planning attorney.