They say that no good deed goes unpunished. Most people think that gift giving is a very good thing, but the tax man sees it as an opportunity to take his share. There is a federal gift tax in place, and you should be aware of this tax when you are making financial decisions.
Fortunately, there are some gift tax exclusions that allow you to transfer a certain amount before the gift tax would become applicable. One of them is the annual per person gift tax exclusion. You can give up to $14,000 in gifts each year to any number of people, equaling any amount of money, free of the gift tax. The key is to give no more than $14,000 to any one individual.
There is an estate tax as well as a gift tax, and the two taxes are unified. In addition to this $14,000 per person annual gift tax exclusion, there is also a unified gift and estate tax exclusion. The amount of this exclusion is $5.43 million during the current calendar year.
If you gave someone a gift that exceeded $14,000 in value within a calendar year, the gift could be given tax-free if you were to use a portion of your $5.43 million unified gift and estate tax exclusion.
Unlimited Marital Deduction
We should point out the fact that there is an unlimited marital transfer tax deduction. You don’t have to concern yourself with exclusions if you want to transfer assets to your spouse. Unlimited tax-free transfers between spouses are allowed, as long as the people involved are American citizens.
Now, back to the gift tax per se. You can pay school tuition for students free of the gift tax, but the exclusion is limited to tuition only. Fees, books, and living expenses do not fall under this exclusion. Plus, you have to pay the school directly; you can’t give the money to the student tax-free.
The last exclusion that we will touch upon here is the medical exclusion. If you want to pay someone’s medical bills, you can do so without incurring any gift tax liability. This would also extend to the purchase of health insurance coverage.
Wealth Preservation Consultation
If you are exposed to the federal estate tax, you can use the $14,000 per person, per year gift tax exclusion to your advantage. You can also provide educational opportunities for your younger family members tax-free as you reduce the value of your taxable estate in the process.
We can help if you would like to discuss wealth preservation strategies with a professional. Our firm offers free consultations, and you can send us a message through this page to set up an appointment: 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.