Whenever ownership of property is transferred, for nothing or less than full value in return, the Internal Revenue Service levies a tax on the value of that property. This is known as a “gift tax.” A “gift” in this context is defined as, “any transfer to an individual, either directly or indirectly, where full consideration is not received in return.” Generally, all gifts are considered taxable gifts; but there are a few exceptions. Some examples of nontaxable gifts include:
- Tuition or medical expenses you pay for someone
- Gifts to spouses
- Gifts to a political organization
- Gifts to qualifying charities are deductible
- Gifts that do not exceed the annual exclusion for each calendar year
Gifts that do not exceed a certain amount each year do not incur a tax and are not required to be filed with the IRS. This is known as the Annual Gift Tax Exclusion. As of June 2013, the Annual Gift Tax Exclusion was $14,000 per recipient. Any gift amounts exceeding this limit, require the donor to pay the gift tax. This amount will remain unchanged in 2014.
If a married couple wants to give property that they own jointly, they are each entitled to the annual exclusion amount on the gift. That means, the total annual exclusion for a joint gift would be $28,000. The value of gifts you make, other than to qualified charities, cannot be deducted from your taxes.
Does the Annual Gift Tax Exclusion apply to all gifts?
There are a few restrictions to the Annual Gift Tax Exclusion. For example, it only applies to gifts of “present interest,” meaning that the person receiving the gift must be given an unrestricted right to immediate possession, use and enjoyment of the gift. This would include a Christmas check for your grandchild to spend on anything they want.
A gift with a future interest in property, meaning they cannot actually use the gift until a later date, would not be eligible for the Annual Gift Tax Exclusion. One example of this would be an irrevocable trust requiring that the beneficiary not receive the property until she turns 18.
What is the unified credit?
The “unified credit” refers to the gift tax and estate tax exclusions, jointly. These entitle you to a lifetime exclusion of $5.25 million. This means that $5.25 million of your estate is exempt from inheritance taxes if you die in 2013. This amount will increase to $5.34 million in 2014. The unified credit is considered “portable,” which means the credit, or any amount you have not used, will pass on to your spouse when you die.
What happens if I exceed the lifetime exclusion amount?
You are required to pay a 40% gift tax on any gifts that exceed the maximum lifetime exclusion. The only exception is that all gifts to your spouse are tax-free under the marital deduction, as long as your spouse is a United States citizen.