The annual gift tax exclusion allows American taxpayers to give up to $13,000 USD per year to any person without being subject to gift tax. Charitable donations and gifts between spouses are also excluded. The Unified Credit exempts the first $1 million USD in gifts during a person’s lifetime or upon their death. Gift tax exclusion can be used as a wealth planning tool, but gift taxation is complicated and may require consulting a tax advisor.
The annual gift tax exclusion refers to the amount of money or property that the IRS allows American taxpayers to give away each year without having to pay taxes on it. In 2010, the IRS allows people to give $13,000 US Dollars (USD) to any other person without being subject to gift tax. A couple could give a total of $26,000 US dollars (USD) to any other person, provided they file a joint tax return. In this case the gift is divided between the two spouses.
Gifts from one spouse to another are not subject to gift tax, so spouses can give each other money and assets without any tax liability. Charitable donations are also excluded from the gift tax. Contributions made to a 529 educational savings plan by a grandparent for a grandchild are considered gifts and are subject to the gift tax exclusion limit. However, tuition payments made directly to an educational institution on behalf of someone else are not taxable.
The Unified Credit is a tax credit that exempts the first million US dollars (USD) in gifts during a person’s lifetime or upon their death. Gifts that exceed the $1 US Dollars (USD) annual exemption are deducted from the Unified Credit until the $13,000 million US Dollars (USD) threshold is reached. This credit has the effect of eliminating estate tax on the first million US dollars (USD) of an individual’s estate, whether that estate is transferred during the person’s lifetime or upon his or her death.
People often use gift tax exclusion as a wealth planning tool. It is used to give away assets during a lifetime which, if left to heirs at the time of death, would be subject to inheritance tax. Money or property given to a trust is considered a gift, so trusts must be carefully planned to make optimal use of the gift tax exclusion and unified credit.
The giver of the gift, not the recipient, is responsible for paying gift tax. A gift tax exclusion form must be filed with the IRS for any gifts that exceed the exclusion amount. IRS publication 950, Introduction to Estate and Gift Taxes, provides detailed information on the exclusion of the gift tax. IRS Gift Tax Return Form 709 must be filed by the donor for any gift of more than $13,000 US Dollars (USD) to an individual who was not subject to school exclusion. Gift taxation can be quite complicated and may require consulting a tax advisor.
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