One aspect of estate planning involves the U.S. federal gift tax. It is important to understand that you cannot simply give property away without tax consequences.
There are two exemptions that apply to federal gift taxes. One can be used annually, and the other can be used over a lifetime.
- The Annual Gift Tax Exclusion: This is the amount that can be given away by a person in a year. It can be given to any number of people without any federal gift tax consequences. These once-a-year gifts or series of gifts are considered “freebies” if they do not exceed the annual gift tax exclusion. For 2014, that exclusion amount is $14,000. As an example, you could give a family member $5,000 in January 2014, another $5,000 in June and then another $4,000 in December. Since the total of these gifts does not exceed $14,000, they are not subject to federal taxes. Additionally, you can give a family member a car that does not cost more than $14,000, another family member stocks worth a total of $14,000, and so forth. Each of these gifts is not considered for federal gift tax purposes.
- The Lifetime Gift Tax Exemption: This is the total amount that can be given away by a person over his or her entire lifetime. This amount is tied to the federal estate tax exemption. If you gift any amount of your lifetime gift tax exemption, that amount will be subtracted from your estate tax exemption when you die. The American Taxpayer Act was established in 2013, and it stipulates that the lifetime gift tax exemption will equal the federal estate tax exemption and will be indexed for inflation in future years. The exemption in 2014 is $5,340,000. For example, if someone gives away $3,000,000 during his or her lifetime and dies in December 2014, then the person’s federal estate tax exemption will only be $2,340,000. The $3,000,000 in lifetime gifts is subtracted from the 2014 federal estate tax exemption of $5,340,000 which leaves $2,340,000 of the exemption.
- Taxable Gifts: If you make a gift to a family member in 2014 in an amount that exceeds the yearly limit, then you have made a taxable gift. For example, if in one year you gift to one individual $120,000, then your taxable gift is $106,000. That amount is the $120,000 minus the allowed $14,000. Further, the $106,000 in taxable gifts will reduce your $5,340,000 lifetime gift tax exemption down to $5, 234,000 ($5,340,000 lifetime gift tax exemption reduced by $106,000 in taxable gifts equals $5,234,000 of lifetime gift tax exemption remaining).
You must report the taxable gifts to the IRS. Use Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. The return is due on April 15 of the year after the year in which you made the taxable gifts.
There are strategies you can use with gifting and multiple family members. Please contact us if you'd like to discuss.