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Tax Consequences of Gifting

Tax Consequences of Gifting

Not many people realize that gifts may sometimes bear gift tax consequences. In general, a gift is considered taxable if it is in excess of the annual exclusion limit. The annual exclusion limit is currently $14,000.00 per year. If you are married, you may double the annual exclusion to $28,000.00. If a gift exceeds the annual exclusion limit, then a gift tax return must be filed with the IRS and taxes paid in some circumstances.

Although a gift may be considered taxable, it doesn’t mean that gift tax will always be due. Gift taxes are only due when the total gifts made exceed the lifetime exemption amount. The lifetime exemption amount for 2016 is 5.45 million dollars. Each year, however, congress reserves the right to raise or lower that exemption amount.

If the taxable gift exceeds the lifetime exemption amount, then the gift will be taxed at the maximum gift tax rate in effect (approximately 40% currently). For example, if you make a gift of 6.45 million dollars to an irrevocable trusts, for the benefit of your children, then the gift tax would be applied only to 1 million dollars, which is the excess of the lifetime exemption amount. Further, any future gifts will incur gift tax if they exceed the annual gift tax exclusion limit for that year.

Further, there are certain gifts that are not taxable regardless of their amount. These gifts are as follows:

  • Gifts that do not exceed the annual exclusion for the calendar year;
  • Tuition or medical expenses you paid directly to a medical or educational institution for someone;
  • Gifts to your spouse (for federal tax purposes, the term “spouse” includes individuals of the same sex who are lawfully married);
  • Gifts to a political organization for its use; and
  • Gifts to charities.

In order to maximize estate and gift taxation benefits, individuals should utilize their lifetime gift exemptions, spousal portability rules, annual exclusion limits and non-taxable gifting options.

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