Gift Tax Basics

The federal government limits the amount of assets that can be transferred from one person to another in a given year without tax consequences.  Transfers of assets or property above a certain amount are subject to the “gift tax.”  The annual gift-giving exclusion is $14,000 for individuals and $28,000 for married couples. 

What happens if you go over this amount?  Any year in which you exceed the annual gift tax exclusion amount, you are required to file IRS Form 709 as part of your federal income tax return.  This alerts the IRS that you have gone over your annual allotment of gift-giving and subsequently reduces the amount of your lifetime gift tax exemption. 

Although your income tax bill is unlikely to be affected by financial gifts, they could have a financial impact on your estate after you die.  This is because the amount of lifetime gifts you have made over and above your annual gift exclusion determines whether or not your estate will be subject to the estate tax.  When making financial gifts, each individual can take advantage of the unified credit, which applies the lifetime gift tax exemption to estate taxes.  This means that as long as gifts made both during one’s lifetime and after death do not exceed a specified amount, they will not be subject to taxes. 

Fortunately, for 2014, the first $5.34 million of an individual’s estate is exempt from estate taxes.  This means that, unless you have an estate larger than that amount or you have substantially exceeded the annual gift tax exclusion over your lifetime, you will likely owe nothing in taxes.  Anything above $5.34 million limit is taxed at 40% and is portable between spouses. 

See Adam Zoll, Gift and Estate Taxes: Why You Might Never Owe a Penny, Morningstar News, Oct. 10, 2014.