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Each week, during appointments with clients, one of the topics that consistently is discussed is the amount of assets that an individual can gift to family members without paying gift tax. Most clients believe that you are only permitted to gift $10,000.00 to each person, and if you gift more than $10,000.00 to an individual, then you will need to pay a gift tax. However, that conclusion is probably incorrect. Pursuant to the Internal Revenue Code, for the calendar year 2015, individuals are allowed to gift an asset with a value of up to $14,000.00 per person per year. This is called the Gift Tax Annual Exclusion. It changes periodically, however, it has been $14,000.00 since 2013. The following are the amounts over the last few years:
$10,000—2001 and before
$11,000—2002—2005
$12,000—2006—2008
$13,000—2009—2012
$14,000—2013 to present
Here is an example of how the annual exclusion works: Example: Let’s assume a husband and wife has two children who are both married. The husband could gift each child $14,000.00 and each child’s spouse $14,000.00, for a total of $56,000.00. The wife could also gift a total of $56,000.00 to those individuals as well. In addition, this could be done each calendar year.
However, the real question is what happens if an individual gifts more than $14,000.00 to another individual. There may or may not be tax on this additional gift. Each individual, in addition to the annual exclusion, also has a gift tax lifetime exclusion which matches the individual’s federal estate tax exclusion as well. For the calendar year 2015, that gift and estate lifetime exclusion amount is currently $5,430,000.00.
For example, let’s say that an individual makes a gift of $20,000.00 to another individual in a calendar year. That is a gift of $6,000.00 in excess of the annual exclusion amount. In addition, let’s assume that the individual making the gift has never made any gifts previously in excess of the annual exclusion amount. Therefore, the individual made a gift of $6,000.00 more than the annual exclusion and that individual will not be paying any gift tax. However, the $6,000.00 simply reduces the amount of the individual’s gift tax and estate tax lifetime exclusion. Therefore, if that individual passed away in 2015, their estate tax lifetime exclusion would be $5,424,000.00 ($5,430,000.00 minus $6,000.00). No gift tax has to be paid unless the amount of taxable gifts during life exceeds the individual’s remaining gift tax exclusion. Also, no federal estate tax has to be paid unless the amount of estate assets at death exceeds the individual’s remaining estate tax exclusion. The excess is taxed at 40% of all assets in excess of the exclusion amount.
Individuals also need to know that in addition to the annual exclusion amount, there are certain types of gifts that do not create a gift tax. Gifts to charities, gifts to pay someone’s medical expenses if paid directly to the health care provider and educational expenses if paid directly to the college or university can be unlimited and are not subject to gift tax.
If you have any questions regarding gifting and how it relates to your particular situation, you should contact your local estate planning attorney.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
James F. Contini II, Esq.
Certified Specialist in Estate Planning, Trust & Probate Law
by the OSBA Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
158 North Broadway
New Philadelphia, Ohio 44663
Phone: 330-364-3472
Fax: 330-602-3187
Email: jcontini@www.kwgd.com