You may have wondered whether the gift tax applies to any gifts you have made or plan to make. The good news is that the American Taxpayer Relief Act of 2012 set a permanent exemption for gift and estate taxes at a high-enough level ($5 million, indexed annually for inflation) that relatively few gifts should be subject to the tax.
Even so, it’s important to understand the gift tax provisions in order to take advantage of the exemption and possibly eliminate or reduce your tax liability.
Annual Exclusion
In 2015, you can give up to $14,000 ($28,000 for a married couple) in cash or certain types of property, including income-producing stocks and bonds, to as many people as you wish without any gift tax liability. Certain gifts are not subject to the annual limit, including gifts to your spouse (as long as he or she is a U.S. citizen), donations to qualifying charitable organizations, and payments of tuition or medical expenses on behalf of another person that are paid directly to the educational or medical institution.
For example, if a grandparent wants to help with a grandchild’s education at a level above the annual exclusion amount, it might be more tax effective to pay the school directly rather than give money to the student or his or her parents.
Lifetime Exemption
A lifetime exemption applies to federal estate and gift taxes combined. For estates of those who die in 2015, the exemption is $5.43 million (up to $10.86 million for a married couple). Any amount applied toward your lifetime gift tax exemption would reduce the exemption available for estate taxes. Both the annual exclusion and the lifetime exemption are indexed annually for inflation.
For gifts above the annual exclusion amount, you must file a federal gift tax return (Form 709) in order to apply the lifetime exemption to the gift. You may also have to file a return for certain types of gifts below the annual exclusion. Be sure to consult a tax professional before taking any specific action.
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.