Understanding the Gift Tax
Most of us will never face taxes related to money or assets we give away.
Misconceptions surround this tax. The IRS sets both a yearly gift tax exclusion amount and a lifetime gift tax exemption amount, and this is where the confusion develops.
Here’s what you have to remember: practically speaking, the federal gift tax is a tax on estates. If it wasn’t in place, the rich could simply give away the bulk of their money or property while living to spare their heirs from inheritance taxes.
Now that you know the reason the federal government established the gift tax, you can see that the lifetime gift tax exclusion matters more than the annual one.
“What percentage of my gifts will be taxed this year?” Many people wrongly assume that if they give a gift exceeding the annual gift tax exclusion, their tax bill will go up next year as a result. Unless the gift is huge, that won’t likely occur.
The IRS has set the annual gift tax exclusion at $14,000 this year. What this means is that you can gift up to $14,000 each to as many individuals as you like in 2015 without having to pay any gift taxes. A married couple may gift up to $28,000 each to an unlimited number of individuals tax-free this year – this is known as a “split gift”. Gifts may be made in cash, stock, collectibles, real estate – just about any form of property with value, as long as you cede ownership and control of it.1
So how are amounts over the $14,000 annual exclusion handled? The excess amounts count against the $5.43 million lifetime gift tax exemption (which is periodically adjusted upward in response to inflation). While you have to file a gift tax return if you make a gift larger than $14,000 in 2015, you owe no gift tax until your total gifts exceed the lifetime exemption.1
“What happens if I go over the lifetime exemption?” If that occurs, then you will pay a 40% gift tax on gifts above the $5.43 million lifetime exemption amount. One exception, though: all gifts that you make to your spouse are tax-free provided he or she is a U.S. citizen. This is known as the marital deduction.1,2
“But aren’t the gift tax and estate tax exemptions linked?” They are. The gift tax exemption and the estate tax exemption are sometimes called the unified credit. So if you have already made taxable lifetime gifts that have used up $4 million of the current $5.43 million unified credit, then only $1.43 million of your estate will be exempt from inheritance taxes if you die in 2015.2
However, the $5.43 million unified credit extended to each of us is portable. That means that if you don’t use all of it up during your lifetime, the unused portion of the credit can pass to your spouse at your death.
In sum, most estates can make larger gifts during the individual’s life without any estate, gift or income tax consequences. If you have estate planning questions in mind, turn to a legal or financial professional well versed in these matters for answers.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax-Made-Simple/INF12127.html [2/24/15]
2 – schwab.com/public/schwab/nn/articles/The-Estate-Tax-and-Lifetime-Gifting [1/28/15]