A Guide To Gifts & Taxes

Oct 30, 2015

Leaving a financial legacy is a wonderful achievement. However, there’s something to be said for sharing the wealth when you can experience the joy of giving. If you’re worried about taxes taking a bite, you might be surprised at how much you can give away before the federal gift tax becomes an issue. Here’s what you need to know.

How much can you give away tax-free?

For starters, you can make gifts of up to $14,000 (per person) to as many people as you wish during the 2015 calendar year and generally no gift tax will be due.* This gift-tax annual exclusion (which is periodically inflation adjusted) allows you to give away a substantial amount. For example, you could give eight grandchildren $14,000 each this year — $112,000 total — and no gift tax would be due. Your gifts can be cash, securities, or other property. And you can make the gifts to anyone, not just relatives.

Married couples who satisfy certain tax law requirements can agree to split their gifts. With gift splitting, all gifts made by either spouse to third parties during the calendar year are considered made one-half by one spouse and one-half by the other. That way, a couple’s combined annual exclusion gifts can be as much as $28,000 per recipient.

What if you exceed the limit?

Gifts that aren’t protected by the gift-tax annual exclusion generally count against the cumulative amount that can be protected from gift and estate tax by your unified credit. This basic exclusion amount is currently $5.43 million.

Are there other times when the gift tax doesn’t apply?

An unlimited tuition exclusion allows you to pay tuition at qualifying educational institutions. An unlimited medical exclusion allows you to pay medical providers for unreimbursed medical costs. Note that payments must be made directly to the institution and/or care provider and may be made on behalf of any individual, related or not.

Transfers to spouses generally are not subject to gift tax due to a marital deduction (exceptions apply). Similarly, gifts to charities aren’t taxed in most circumstances because of a charitable deduction.

• To use the gift-tax annual exclusion, the gift generally must be of a “present interest” (i.e., the gift recipient’s enjoyment of the property can’t be postponed until sometime in the future).

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