For Mark Roberts’ Use: It’s almost that time again – time to file your federal income taxes! As with many things in life, knowledge and preparation for tax time can help you avoid consequences you regret. If you gave any large gifts last year, or are planning to do so this year, it might help you to understand the gift tax.
Contrary to popular misconception, the gift tax is not the same as the estate tax. Estate taxes apply to property conveyed to others after your death. The gift tax applies to gifts of money or property that you make while living. The gift tax applies to the donor of the gift, not the recipient. So if you give away money or property, there could be negative consequences for you.
However, the way that you give a gift can protect you from additional tax burdens. For example, if you wish to pay a grandchild’s college tuition, don’t write them a large check directly. You can pay the tuition directly to a qualified institution of higher education, and you won’t owe gift tax on the money.
Gifts to a charitable or political organization are not taxable, so keep that in mind when making decisions about your money. You can also give a gift to your spouse without worrying about gift taxes.
So when does the gift tax apply? You aren’t required to file a gift tax return unless a single gift exceeds the exclusion amount of $14,000 (indexed annually for inflation; check with your tax professional to be certain of this amount before making any decisions about gifts). Exclusions are provided for each individual gift, rather than the total gifted amount for a calendar year. Therefore, you can give away more than $14,000 to different recipients in a single year without worrying about the gift tax, so long as a single recipient does not receive more than the exclusion amount.
Gifts from you and your spouse are treated separately under tax law. So if you want to gift a single recipient more than $14,000, you and your spouse can each write a separate check. Again, it is best to discuss this issue with your tax professional before making a final decision about the gift.
Gift tax exemptions are cumulative and are subject to a lifetime limit, meaning there is a limit to the amount of tax-free gifts you can give in a lifetime. The lifetime gift tax exemption is $5.34 million as of 2014. Since gift tax exemptions and lifetime limits can be confusing and complicated, always consult with your tax professional before making any assumptions about your tax status or making large gifts to individuals or organizations.