We’ve all heard about the federal estate tax. And you’ve probably also heard that Congress passed a $5.25 million exclusion. But did you also know that there’s a federal gift tax as well? And more importantly, that the monetary gifts you give could affect how much of your estate is exempt from taxes at your death?
Here’s how it works:
The $5.25 million exclusion is considered a “unified” exclusion… that is, it is a lifetime exclusion that applies to both money given out during your lifetime as a gift as well as money transferred at death. and money given out as gifts. That means that if you give a gift that triggers the gift tax and you don’t pay that tax separately, the amount is deducted from the $5.25 million that can be transferred at the time of your death.
For gifts given in 2013, you are allowed to give up to $14,000 during the year without triggering the gift tax and this amount is indexed each year for inflation. Any monetary gifts that exceed this amount are subject to the gift tax. If you make a gift in excess of the annual gift exclusion of $14,000 in any one calendar year you are required to file a 709 Federal Gift Tax return so the IRS can deduct it from your the lifetime $5.25 million exclusion amount.
Fortunately, there are some exemptions to this rule, enabling you to provide for your loved ones throughout your lifetime without necessarily triggering the gift tax and/or reducing the amount of your estate that can be transferred to your heirs upon your death.
One such exemption is education. You are allowed to pay school tuition for students as a gift, without incurring the gift tax or reducing your lifetime unified credit. There is no limit to the amount that you can pay, but this exemption applies only to tuition and doesn’t extend to any other related education expenses.
You can also pay the premiums for health care insurance as well as medical expenses of others without incurring any gift tax liability. This can certainly be a meaningful gift if you have a family member or friend who is facing some overwhelming medical bills. The caveat is that your payments must be made directly to the institution. Simply reimbursing someone after the fact for the expense doesn’t count as part of the exemption.
In addition, gifts to your spouse (provided he or she is a US citizen), gifts to charity and gifts to political organizations are also considered exempt. And in case you’re wondering, these gift tax exemptions apply separately to you and your spouse. That means you could each pay tuition expenses for example, up to the annual limit without triggering any additional tax.
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