You may be surprised to hear that the gifts that you give are technically taxable. The reason why you are not faced with a tax bill every time that you give someone a birthday gift is because there are exclusions.
Let’s take a look at these gift tax exclusions.
Annual Gift Tax Exclusion
There is an annual per person gift tax exclusion. The amount of this exclusion is $14,000 at the time of this writing in 2014.
You can give as much as $14,000 per person to any number of gift recipients within a calendar year free of the federal gift tax.
Those who are exposed to the federal estate tax could choose to use this gift tax exclusion to give gifts while they are living to gain estate tax efficiency.
It should be noted that you do not have to use your gift tax exclusion to give gifts to your spouse. There is an unlimited marital deduction. You can give any amount of money to your spouse free of transfer taxes.
Unified Lifetime Gift and Estate Tax Exclusion
In addition to the annual gift tax exclusion, there is a unified lifetime gift and estate tax exclusion. At the present time the amount of this exclusion is $5.34 million.
You can transfer up to $5.34 million free of taxation. This would include transfers that take place after you pass away, and transfers that are initiated while you are living.
To be clear, this exclusion exists apart from the annual lifetime exclusion. To explain how they interface, let’s look at a simple example.
Suppose you give a $14,000 gift to your son on February 1st. You can give this gift tax-free using the annual gift tax exclusion.
Later on in the year you decide to give your son $1 million to buy a home. You have already used your $14,000 per person, per year annual exclusion. However, you could use a portion of your unified lifetime exclusion to give this gift tax-free.
You would then have $4.34 million left to apply to future gifts and the estate that you will be passing on to your heirs.
Educational & Medical Gift Giving
There is an educational gift tax exemption. You can pay school tuition for students without incurring any gift tax liability. This is a tuition only exemption; you cannot use it to pay for books, fees, and living expenses. It should also be noted that you must pay the institution directly. You can’t give the money to the student tax-free.
It is also possible to pay medical bills for others without facing a gift tax levy. There is no limit to the amount that you can pay, and the medical exemption extends to the purchase of health care insurance.
Blaine Peterson
Author, Attorney
Parman & Easterday
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