The federal gift tax is in place to prevent people from giving gifts in an effort to avoid the estate tax. Shortly after the enactment of the estate tax in 1916, people did give gifts to sidestep the tax, because there was no gift tax. The gift tax was enacted a few years later, and after a brief repeal, it was reenacted in 1932, and it has been in place ever since.
Annual Gift Tax Exclusion
Every gift that you give is not going to be taxed, because there are some gift tax exclusions. One of them is the annual per person exclusion. You can give up to $14,000 per year to as many people as you would like to free of the gift tax.
We should point out the fact that you do not have to worry about the gift tax at all if you are giving gifts to your spouse. There is an unlimited transfer tax deduction that allows you to transfer unlimited assets to your spouse free of taxation.
Unified Lifetime Exclusion
The gift tax and the estate tax are unified, and there is a unified lifetime exclusion that exists apart from the annual gift tax exclusion. If you wanted to give gifts to individuals that exceeded $14,000 per person within a calendar year, you could give the gifts tax-free by using a portion of your unified lifetime exclusion.
During the 2015 calendar year, the amount of this exclusion is $5.43 million. This is the amount that you can transfer to anyone other than your spouse before the transfer taxes would become a factor.
Educational Exclusion
In addition to the two exclusions that we have touched upon to this point, there is also an educational gift tax exclusion. If you want to pay school tuition for students, you could do this without incurring any gift tax exposure.
This exclusion only applies to tuition. It does not apply to books, miscellaneous fees, and living expenses, but you could use your $14,000 annual exclusion to provide additional support.
Plus, remember, each taxpayer has his or her own $14,000 per person, per year exclusion. As a result, if you are married, you and your spouse could combine your respective exclusions to pass along as much as $28,000 to any number of gift recipients within a calendar year tax-free.
Medical Exclusion
The last exclusion we will look at here is the medical exclusion. You can pay medical bills for others free of the gift tax, but you have to pay the providers directly.
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If you are interested in the possibility of working with our firm after learning these facts, please select our “Workshops” tab to RSVP for a free estate planning workshop. At that workshop you will be offered a free one-hour consultation with an attorney: www.collinslawgroup.com/seminars/
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