Did you know that when you give gifts to your family, friends, and loved ones that the IRS has an interest in it?
Gift Tax is a tax that is imposed on the transfer of property from one individual to another, where full value (money or something of similar value) is not received in return. Unfortunately, the IRS doesn’t quantify love as a full value. A gift tax isn’t imposed on every gift, though. In fact, unless you’re a very generous giver, you probably won’t ever have a gift tax imposed on anything that you give.
Here are five points that you need to know about gift taxes.
- There’s an annual limit. Every person is allowed to give up to $14,000 per year to any person that they wish, and they can give this amount to as many different people as they want to. Up to that amount, the gift tax doesn’t apply at all. A married couple can jointly give double the amount, or $28,000, to any person in any year. At this level or below, no tax applies and a Gift Tax return is not required.
- There’s also a lifetime limit. Above the annual limit, every individual has a lifetime exemption amount that they can give. For 2013 the lifetime limit is $5,250,000, and it rises to $5,340,000 in 2014. (State limits may differ. Check your state for its lifetime limit.) So, if you give a gift to someone that is above the annual limit of $14,000, the amount is deducted from your lifetime exemption amount. A Gift Tax return is required to be filed when you have gifts above the annual limit in any year.
- Give as much as you like to your spouse. Gifts to your spouse are not included in either the annual or lifetime limit. You can transfer as much property as you like to your spouse with no gift tax consequences. Likewise, gifts to qualified charities or political organizations are not counted toward either limit.
- You can help out with medical bills and tuition. You also can give as much as you like (with no gift tax consequences) toward tuition or medical expenses of another person, related or not. The stipulation is that the payment for tuition or medical expenses must be directly to the education or medical institution, rather than to the individual receiving the benefit.
- Big gifts can mean big costs. If you’re a big gifter and you’ve gone beyond your annual and lifetime limits, the cost is pretty steep: the gift tax rate is presently 40%, and it is owed by the person giving the gift.
Avoid tax on the gifts you plan to give by keeping these five tips in mind!