The 5 Million Dollar Gift Tax Exclusion

Did you know there is an annual federal gift tax exclusion AND a lifetime gift exemption, which was raised to $5.49 million in 2017? Gift taxes are often a confusing topic. Fortunately, it is not that difficult to explain. Here are a few common questions and answers about the gift tax.

  1. What is the gift tax? The gift tax is a potential financial obligation on the part of the giver of any gift.
  2. Who pays the gift tax? The giver pays the tax. The receiver does not.
  3. When does the gift tax apply? Gift taxes may apply when any asset is transferred to another without the full value of the item being paid in return. There are many situations where the gift tax may not apply. For example, medical or student expenses paid as a gift are exempt from the tax. Additionally, there are yearly and lifetime exclusions, and if the gifts are under these amounts, no tax will be owed. Finally, gifts to your spouse or a political organization are exempt.
  4. In 2011, the estate tax and gift tax exclusions were combined. Now, there is a lifetime limit of 5.49 million dollars, which can be gifted before the gift tax kicks in. This means that most people won’t have to worry about the gift tax, as this is quite a sizeable sum for much of the population.
  5. There is also an annual exemption. Any gifts you make that are under $14,000 annually will not count against your lifetime limit of $5.49 million. You can spread gifts out to multiple individuals without going over your limit as well. Giving $12,000 each to 3 different people will not count against your lifetime limit since you’re under the allowable $14,000 per person, per year. However, a gift of $36,000 to one person would end up with a gift tax liability for $22,000.
  6. The $5.49 million estate tax exemption means that on your death, your estate will not be liable for federal or gift taxes as long as the combined worth of your estate + any gifts made over the $14000 annual limit is less than $5.49 million dollars.

So, if you are looking to give gifts, take full advantage of the $14,000 yearly exclusion. Spreading your gifts out so that each recipient receives less than $14,000 per calendar year means that your estate will have as little tax burden as possible when it is left to your heirs. Always consult a tax advisor for further information about tax related issues.

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