Annual gift tax exclusion: who does it impact?

The annual gift tax exclusion is widely misunderstood. Many people believe that for tax purposes they must stay under the exclusion limit. In fact, for the vast majority of people, the annual exclusion - currently $14,000 - effectively has no impact.

I can best explain by first examining a related concept: The lifetime unified gift tax and estate tax exemption. This is the maximum amount the federal government permits you to pass, free of federal gift tax (for gifts you make during your lifetime) and free of federal estate tax (for money you pass at your death). The current lifetime exemption is $5,450,000.

The annual gift tax exclusion permits you to give away, free of gift tax, up to $14,000 to any one individual within any calendar year, to as many individuals as you wish. (If married, each spouse may pass that amount.) A gift of less than $14,000 is not deducted (i.e., "excluded") from your lifetime exemption of $5,450,000. A gift under $14,000 does not need to be reported to the IRS.

But what happens if you give a gift to one or more individuals in a calendar year in excess of $14,000? In this case, you have to report the amount over $14,000 to the IRS, which will deduct that amount from your lifetime exemption of $5,450,000. However, until you have given away $5,450,000, you actually owe no tax. Here are two examples to clarify this point:

• Ann has made no gifts during her lifetime and has her full $5,450,000 lifetime exemption. She has three children. She gave $14,000 to each of them in 2015. She was not required to file a gift tax return since none of the gifts exceeded the annual exclusion. She owed no gift tax. Her lifetime exemption remained untouched. She still has the right to pass on $5,450,000, free of estate tax and gift tax.

• John has two children. He has not used up any of his lifetime exemption and has $5,450,000 to give away over the course of his lifetime, tax-free. In 2015 he gave $54,000 to his daughter to help her purchase a home. He also gave $14,000 to his son. Since the gift to his daughter exceeded the annual exclusion, John had to file a gift tax return. The IRS deducted the amount over $14,000 he gave to his daughter ($40,000) from his lifetime exemption. John is now left with $5,410,000 to pass tax-free for the rest of his life (and/or at death). He does not actually owe any tax on the $40,000.

In short, any gift over $14,000 to any one individual in any one calendar year requires you to file a gift tax return. But you owe no taxes until such time as you've used up your $5,450,000 lifetime exemption. This is why, for the average American with more modest assets, the $14,000 annual exclusion is effectively meaningless. 

But let us not give short shrift to those who do have assets in excess of $5,450,000 and eager to pass as much tax-free money as possible to heirs. If this describes your situation, you have several methods at your disposal that allow you to pass more than $14,000 tax-free per year to one or more individuals. You may, for example, pay for someone's school tuition in any amount, so long as you pay the educational institution directly. This is what many of my wealthier clients do for their grandchildren. You get a similar tax break for any amount you pay for an individual's medical care, provided the funds go directly to the medical provider. Talk to our attorneys about these and other tax-savings strategies.

Last, a word to everyone, regardless of net worth: Laws are always changing as economic and political winds shift. Fifteen years ago the lifetime exemption was $675,000. Two years ago the annual exclusion was $13,000. Depending on where the tax laws head, you may need to do some tweaking of your estate plan, as well as revisit your plans to make gifts to your loved ones. As far as taxes go, nothing is ever set in stone, so for your and your family's benefit, it's wise to stay informed.

IRS announces 2015 estate tax exemption

The estate tax certainly isn't what is used to be. And that's a good thing. Before 2001, a significant percentage of my estate planning clients were concerned with finding ways to minimize estate taxes. But with the current generous estate tax exemption, today's client typically is more concerned with minimizing capital gains taxes and income taxes. 

Of course, if you are among the minority of individuals with a potentially taxable estate, you still need to be concerned about estate taxes. You'll be glad to hear that in 2015, the lifetime unified estate and gift tax exemption will increase to $5.43 million per individual, up from $5.34 million. This is the amount that you may give away free of estate and gift taxes during your lifetime and at your death. If you are married, you and your spouse may double that amount. Moreover, a surviving spouse may use any portion of the deceased spouse's unused estate tax exemption (provided that the survivor elects the "portability" option on the final tax filing). The top tax rate for anything above the exemption is 40%. 

The annual gift tax exclusion will remain unchanged in 2015, at $14,000. This is the amount that you may transfer to another person other than your spouse, free of gift tax and without impacting your lifetime exemption. If you are married, you and your spouse may double that amount. For example, a married couple could give each of their three children $28,000 per year without any gift or estate tax ramifications. Certain gifts may exceed $14,000 per year and still incur no gift tax, such as a check written for a child's college tuition when the check goes directly to the educational institution. 

Learn more about estate and gift taxes here.

2014 Tax Update: Lifetime estate and gift tax exemption increases, annual exclusion unchanged

The federal estate tax has been up, down and back again in recent years, so let’s review the current status and what it means for you: 

Effective Jan. 1, 2014, the unified lifetime gift and estate tax exemption is $5.34 million. This is the maximum amount you may give away, during your lifetime and/or at death, free of any gift or estate taxes. A married couple may double that amount. 

The annual gift tax exclusion remains the same as last year, $14,000. This means that each year, you may give as many individuals as you wish up to $14,000, free of gift tax. A married couple may double that amount. If you give one or more individuals more than this $14,000 in any given year, you must file a gift tax return, although no tax is actually due until you have given away more than $5.34 million in excess of the $14,000 annual exclusion.

Estate and gift taxes are widely misunderstood. Below I provide clarification on some of the most common grey areas:  

• A gift that is exempt from estate and gift taxes will not necessarily be exempt if you apply for Medicaid long-term care benefits. If the transfer is for less than fair market value and was made within the look-back period, you will be penalized. Do not confuse tax-exempt with Medicaid-exempt. 

• A U.S. citizen who inherits assets from a spouse will owe no estate taxes regardless of the size of the deceased spouse’s estate. Moreover, as a result of 2010 tax legislation, the survivor may use any unused portion of the deceased’s lifetime estate and gift tax exemption. This so-called portability option is not automatic, however; the survivor must file an estate tax return for the deceased spouse’s estate on a timely basis, and elect the portability option – even if the deceased spouse’s estate is not taxable. The likelihood of the survivor’s estate being sufficiently large so as to be taxable at the survivor's death is the key factor when considering whether a return should be filed. (Note: the survivor loses the deceased’s tax credit if he/she remarries, even if the portability option has been retained.) Read more about portability. 

• An estate that is not subject to federal estate taxes may still be taxable on the state level. Florida does not have a state estate tax, but other states do. For example, New Jersey taxes anything over $675,000; New York, anything over $1million. Even if your estate is not subject to federal estate taxes, you should discuss possible tax planning with our estate planning/elder law attorneys, as many aging Floridians eventually return to their home state to be closer to the support and companionship of family. 

• As we often point out, estate taxes and probate are unrelated. Any assets that are titled in the name of the deceased individual (not in a trust) that do not have a designated beneficiary or co-owner, must pass through probate court. If there is a valid will, the asset(s) will be distributed according to the will. If there is no will or trust, the asset(s) will be distributed according to Florida intestacy laws. If you wish to spare your family the rigors of probate, you must create a probate-avoidant plan, even if your estate is not taxable.

"Permanent" estate tax, right? Um, maybe not

The American Taxpayer Relief Act provided just that - relief - to estate planners and clients when it was passed by Congress in January 2013. The so-called federal "fiscal cliff" legislation was hailed as putting to rest the uncertainty that has surrounded federal estate and gift taxes since the Bush tax cuts took effect over a decade ago. 

The Act set the unified federal estate tax and gift tax at $5 million per person, with annual adjustments for inflation (the current rate is $5.25 million). The law allowed married couples to double that exemption, and allowed survivors to use the deceased spouse's exemption, too ("portability").

We too breathed a sigh of relief when we reported the news back in January. But we also added this proviso:"Bear in mind that no legislation is indelible or unchangeable." That caution was underscored in April, with the release of President Obama's proposed budget for 2014. Under that proposal, the estate tax would revert in large part to its 2009 levels, as follows:

• The federal estate tax exemption would decrease from its current level of $5.25 million indexed to inflation, to $3.5 million, not indexed to inflation. Obviously this would scoop up many currently nontaxable estates. 

• The top estate tax rate would increase from 40% to 45%.  

• The generation-skipping transfer tax exemption would revert to $1 million. 

• The gift tax exemption would return to $1 million and there will no longer be a unified estate and gift tax exemption.

Like we said, when it comes to legislation, nothing is permanent -- except the possibility of change.  We will continue to keep you posted on any new developments.

Congress finally serves up some certainty on federal estate and gift taxes

And they said it couldn't be done! 

Just hours before the 112th Congressional session expired, the House passed the  American Taxpayer Relief Act, keeping us from falling off the  fiscal cliff - for now, anyway. 

The law also ends years of uncertainty about federal gift and estate taxes, removing much of the guesswork that has plagued estate planning efforts over the past years. Its main provisions:

1. Sets the lifetime gift and estate estate tax exemption at $5 million per person, with annual adjustments for inflation. Married couples may combine their exemptions to pass double that amount.(The 2012 rate is $5.12 million; the number will be readjusted for 2013 and beyond as necessary.)
2. Increases the top tax rate on taxable estates from 35% to 40%. The minimum rate is now 37%.
3. Retains the current portability provision, which allows a person to utilize the unused portion of the deceased spouse's lifetime exemption.

Obviously, this is good news for most families, who now do not have to worry about estate or gift taxes for the foreseeable future. Although this legislation is "permanent" in the sense that it is not designed to expire as the Bush tax cuts were, bear in mind that no legislation is indelible or unchangeable. 

Federal estate tax considerations are, of course, only one reason to engage in good estate planning. A sound estate plan allows you to achieve numerous goals beyond tax avoidance, including:

1. Avoiding or minimizing STATE estate taxes. Although Florida does not impose its own estate tax, many other states do. Many Floridians, after the death of the first spouse, or as a result of their aging or incapacity, relocate to live closer to family members in other states. Without proper planning for this possibility, the new state may impose estate tax.
2. Protecting assets from the astronomical cost of long-term care.
3. Ensuring that any assets you leave behind go to the people you want to get them, and stay out of the hands of those you don't want to get them.
4. Avoiding estate challenges after you are gone.
5. Avoiding probate.
6. Naming the people you want to manage your estate after you are gone.
7. Keeping the courts out of your affairs and reducing the likelihood of court-ordered guardianship in the event of incapacity.
8. Designating someone to handle your financial affairs if you become disabled.

Another aspect of the new law that has gone largely unreported in the past 24 hours is the establishment of a long-term care commission. The 15-members will include consumers, older adults, caregivers and care providers appointed by the President and Congress. The group will be tasked with finding viable financial solutions to the growing long-term care crisis.

Annual Gift Tax Exclusion To Increase in 2013

Beginning January 1, 2013, the annual gift tax exclusion will be adjusted for inflation, rising to $14,000, from its current level of $13,000.  The annual gift tax exclusion is the amount you can give tax-free to any one individual in any one year, without impacting your lifetime exemption and without having to file a federal gift tax return.

You may give up to $14,000 to as many individuals as you wish in any one year. Married couples can double that amount - for example, a married couple could give $28,000 to each of their three children in 2014, for a total of of $84,000. Most people choose to make cash gifts, or assets that are likely to appreciate in the future.  Many of my clients gift into a grandchild's 529 college savings plan.

Many people mistakenly believe that such gifts are taxable to the recipient. That is not the case, because gifts do not qualify as income under Internal Revenue Code.

Bear in mind that you are not limited to the $14,000 cap if you pay for an individual's educational or health care expenses. However, you must pay the educational institution or medical provider directly.

The annual gift tax exclusion is different from the lifetime estate tax exemption. The lifetime estate tax exemption is currently $5.12 million but is scheduled to decrease to $1 million next year if Congress does not act.

More information:

Estate and gift taxes.

Update on the status of federal estate and gift tax legislation.

Estate planning strategies that may help you reduce estate taxes.