What Is the Gift Tax, and When Does It Apply?
What is the Gift Tax?
The gift tax is a tax levied on the transfer of property from one person to another in exchange for nothing or for less than the property’s full value. While this seems to cover many transactions that most of us make many times throughout the year, the exceptions to the gift tax actually make taxable gifts fairly rare.
Transfers not subject to gift tax include
- Gifts of less than the annual exclusion for the given calendar year ($14,000 in 2015)
- Tuition or medical expenses paid on another’s behalf
- Gifts to one’s spouse
- Gifts to a political organization
How Does the Annual Exclusion Work?
The annual exclusion is not the total amount you may gift free of tax in a given year. Rather, it applies to the gifts you make to each donee; so, a taxpayer may give up to $14,000 worth of property to each of any number of people in 2015 without incurring gift tax. This makes it easy to transfer large amounts of non-taxable property each year.
Furthermore, because each individual taxpayer is entitled to the annual exclusion, married couples may gift a total of $28,000 per donee gift-tax free in 2015.
Example: Both you and your spouse could give $14,000 each to your four children and six grandchildren, for a total of $280,000, without the 2015 gift tax kicking in.
What If I Exceed the Annual Exclusion?
If you exceed the annual exclusion in taxable gifts, then you must file Form 709 to report these gifts. Spouses must each file their own Form 709, as each is entitled to his or her own individual exclusion. Gifts of joint property are considered to be made one half by each spouse.
Lifetime Gift Tax Exemption
Having to file Form 709 does not necessarily mean that you will owe gift tax. In fact, chances are you will not. This is because the IRS has a unified gift and estate tax system, meaning that lifetime gifts and gifts from your estate are treated similarly. When you make a gift in excess of the annual exclusion rate, the difference between the value of the gift and the annual exclusion rate is deducted from your lifetime gift tax exemption, which is set at $5.43 million for 2015. Any gifts that you give that fall below the annual exclusion rate, however, do not affect your lifetime exemption.
For example, you may give up to the full annual exclusion amount to each of your three children each year from now until your death while retaining your entire $5.43 million lifetime exemption. That means that in addition to the substantial gifts you give during your life, each of your heirs may receive gifts from your estate up to the full lifetime exemption that is in effect at the time of your death without ever incurring gift or estate tax.
If, on the other hand, you give each of your three children $24,000 in 2015 (as opposed to limiting gifts to the $14,000 annual exclusion), then $30,000 ($10,000 over the annual exclusion X 3) will be deducted from the lifetime exemption that is in effect at the time of your death. For a taxpayer who dies in 2015, this means that each recipient would receive a maximum of $5.4 million tax free from the estate ($30,000 less than the 2015 lifetime exemption).
If you are unsure whether gifts you have made or are thinking of making will be subject to tax, consult a qualified tax professional. Boelman Shaw in Des Moines provides both tax and financial planning services in order to help you make the most of your money. We can advise you on how to structure your gift giving to allow you to provide the maximum benefit to your heirs and other gift recipients. Contact us for a free financial consultation to find out what we can do for you.
Boelman Shaw provides tax advice. Registered Representatives, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representatives, RDA Financial Network, a Registered Investment Advisor. Cambridge Investment Research, Inc., RDA Financial Network, and Boelman Shaw Capital Partners are not affiliated. Cambridge does not provide tax advice. CIR154681
 “Form 709: Do You Need to File a Gift Tax Return?” Fool.com. The Motley Fool, n.d. Web. 15 Oct 2015.