What You Need to Know About the Gift Tax Exclusion & How to Potentially Avoid it

What You Need to Know About the Gift Tax Exclusion & How to Potentially Avoid it

This is due to the fact that even if individuals exceed the $14,000 limit, they will most likely only need to file a gift tax return and apply part of the unified credit – equal to $5,430,000 in 2015 – although they will not owe any money to the federal government.

The gift tax exclusion

The original intention of the gift tax was to prevent individuals from skirting federal estate taxes prior to death. However, despite its design, the gift tax is avoidable because current laws have two provisions in the federal gift tax exclusion that only require most individuals to file a gift tax return. The annual gift tax exclusion allows individuals to give gifts valued at no more than $14,000 per person (donee) for 2015 without paying gift tax or filing a gift tax return.

The annual gift tax provision is the more popular alternative because it saves the lifetime exclusion for the estate tax, which applies only to estates (and lifetime) valued at $5.43 million. Therefore, even if a gift amount exceeds the $14,000 threshold, an individual will need to file a gift tax return and apply a portion of their lifetime exclusion toward the gift, which eliminates the gift tax altogether. However, the $14,000 threshold only applies to gifts to one donee, meaning that an individual can give several $14,000 gifts to different donees in 2015 without being subject to the gift tax. The benefits extend with a married couple as well because these couples can give $28,000 per donee in gifts to an unlimited number of individuals without tax repercussions.

The second alternative is to use the lifetime exclusion in gifting, which enables individuals to exceed the $14,000 threshold without paying tax. With this provision, individuals can file gift tax returns for a large gift and apply the a portion of their lifetime exclusion. The $5.430 million threshold may be applied to gifts made during life or applied against their taxable estate. A gift of $114,000 to one donee would reduce the lifetime exclusion by $100,000 to $5,420,000.

Benefits of the gift tax exclusions

There are other annual and lifetime gift tax exclusions that do not reduce the lifetime exclusion or count toward the $14,000 annual limitation, such as an unlimited marital gift deductions, tuition and medical expenses. An individual is allowed to gift to a spouse for an unlimited amount without being subject to the gift tax threshold. However, in the case of tuition and medical expenses, there is also an unlimited threshold amount for gifts if the payments are made directly to the educational or medical institution.

According to a recent interview in Forbes, Thomas Brockley, Senior Vice President at RBC Wealth Management, noted that there are several options to avoid paying federal gift taxes so that recipients receive the maximum amount of the gift. Particularly with estates left in the event of death because gift assets left to recipients may be eligible to count against the federal gift tax exclusion amount of $5.43 million.