When you give someone a cash gift, you are passing along money that you have left after you paid your taxes. It would be logical to assume that you can give gifts without any further tax consequences, but in reality, there is a gift tax in place.
Fortunately, the tax is not a factor for most people, because there are exclusions that can be used to give a certain amount in a tax-free manner. One of these is the annual gift tax exclusion. This exclusion allows you to give a certain amount to any number of people within a calendar year tax-free.
There have been periodic increases to the amount of this exclusion, but there will be no increase applied in 2016. The gift tax exclusion will remain constant at $14,000 per gift recipient.
There are a couple of other exclusions that many people are not aware of that we should touch upon here. If you want to pay school tuition for students, you can do this without incurring any gift tax exposure. However, this exclusion does not extend to books, fees, and living expenses.
You could use your $14,000 per person annual exclusion to provide some extra support, and if you are married, you and your spouse could give a total of $28,000 to any number of people tax-free within a calendar year.
In addition to the educational exclusion, there is also a medical gift tax exclusion. You can pay medical bills for others without being taxed for your generosity, and this exclusion extends to health insurance purchases.
Unified Lifetime Exclusion
The gift tax is unified with the estate tax, and there is a unified lifetime gift and estate tax exclusion that is completely separate from the annual gift tax exclusion. If you wanted to give gifts to individuals during a calendar year that exceeded $14,000 per person, you could use portions of this exclusion to give the gifts in a tax-free manner.
However, if you use up your exclusion giving tax-free gifts, there would be less to apply to your estate. In 2016, the unfied lifetime federal transfer tax exclusion is $5.45 million. This represents a $20,000 increase over the $5.43 million that was in place in 2015.
Gifting for Tax Efficiency
If your estate is going to be exposed to the estate tax, you could use your annual $14,000 per person exclusion to transfer assets in a tax-free manner. As you are giving the gifts, you would also be reducing the value of your estate, so there would be less to tax after you are gone.
Schedule a Consultation
If you would like to discuss your tax situation or any other estate planning matter with a licensed professional, feel free to contact us through the following page to schedule a consultation: Indianapolis IN Estate Planning Attorneys.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.