Susan I. Jean & Associates is not a tax firm.  We recommend that if you have estate and gift tax questions, or income tax concerns, that you retain other professionals to address these issues.   However, there are some tax basics that are integral to our practice.  The following is a simplified explanation of very difficult laws.

What is the Annual Exclusion Amount?

The Annual Exclusion Amount is the amount a person may give away to any other person each year with no tax consequences and no reporting requirements to the IRS.  

As an example, a single parent with three children could give each of those children $13,000 a year.  Neither the parent nor the children would have any tax consequences, and the gift would not have to be reported to the IRS. 

Note that the Annual Exclusion Amount is not person-specific.  You could give the Annual Exclusion Amount to as many people as you wish each year. 

Are the Rules Different for Married Couples?

Basically, the Annual Exclusion Amount rules are the same for married couples.  Each spouse may give $13,000 a year to a person with no tax consequences.  The only real difference is the ability to "gift-split". 

Gift-splitting is the ability of one spouse to give a gift of double the Annual Exclusion Amount to a person.  As long as the other spouse consents, the IRS will consider the gift to have come half from each spouse. 

As an example, a married couple has one child.  The wife has property worth $26,000 and wants to give that property to her child.  As long as the husband agrees, she can give the property to the child, and the IRS will consider the wife having gifted $13,000 to the child and the husband having gifted $13,000 to the child.  Of course, both the wife and the husband are considered to have used up their Annual Exclusion Amount as to that child for that year. 

What if I Want to Gift More than $13,000 to Someone This Year? 

If you make a gift to a person in one year that is more than the Annual Exclusion Amount ($13,000) then you will have to file a gift tax return telling the IRS how much was gifted. 

It is unlikely, unless it is a very substantial gift or you have given a very substantial amount in the past, that there will be any tax consequences.  During your lifetime, you are allowed to give up to $5,000,000 with no gift tax consequences.  That amount is referred to as the Lifetime Gift Tax Exclusion Amount.   

So, as an example, if a father gave a gift of $100,000 to his daughter this year, he would have to file a gift tax return.  Of the gifted amount, $13,000 would count as an Annual Exclusion Amount gift.  The IRS would deduct $87,000 ($100,000 minus $13,000) from his Lifetime Gift Tax Exclusion Amount.  Therefore, for the rest of his life, he could only give another $4,913,000 tax free (and again, that number would not be reduced by gifts that were under the Annual Exclusion Amount).  If he did not make any other gifts during his life, at his death, he would only have $4,913,000 to leave estate tax free. 

Are All Gifts Included in the Annual Exclusion Amount / Lifetime Gift Tax Exclusion Amount? 

The answer to this question is no.  The following gifts are not considered to be "real" gifts by the IRS:

• Gifts to your spouse
• Paying tuition or medical expenses for someone else directly to the provider
• Gifts to a charity or a political organization for its use

So, you could give your spouse $50,000,000 and there would be no tax consequences.  You could also pay your brother's medical bills, and it would not be considered a gift.  Or, you could pay the tuition costs for your grandchildren, and that would not be considered a gift.  But note, that if you pay someone's medical bills or their tuition, you have to give the money directly to the school or the medical facility, not directly to the person you are helping out. 

A final note to keep in mind is the rules regarding 529 plans.  A 529 plan is a savings plan that is designed to encourage people to save money for the cost of higher education.  Money put into a 529 plan is not subject to federal income tax when it is withdrawn, as long as the money is withdrawn to pay for qualifying education expenses. 

You are allowed to make a lump sum gift to a 529 plan and use up to five years' worth of your Annual Exclusion Amount gifts.  This means that you could transfer five years worth of your Annual Exclusion Amount, or $65,000 (and if you are married, you and your spouse could gift up to $130,000) to a 529 plan to benefit your grandchild. 

However, if you do make this lump sum gift to a 529 plan, you cannot then make gifts to the beneficiary of the 529 plan for the following five year period without using up some of your Lifetime Gift Tax Exclusion Amount.  Additionally, if you die within five years of making the gift, a portion of the gift may be included in your estate for estate tax purposes.