The Internal Revenue Service (IRS) requires gift-givers to pay taxes on gifts that exceed a certain amount. At this time, the tax does not kick in until the person making the gifts gives away $11.4 million or more. However, those with significant assets need to keep these limits in mind and gift wisely.
The good news
Lawmakers wrote the tax code to allow each individual to gift up to the excluded amount. As a result, a married couple can each, individually gift $11.4 million in assets. This means a married couple can likely reduce their estate by approximately $22.8 million before triggering the tax.
There are other gifts that are exempt and do not trigger the tax. These can include donations to IRS-approved charities, gift for medical expenses and gifts for tuition.
The bad news
In addition to a total exclusion amount there is also an annual exclusion amount. Those who gift without knowing the rules that govern this annual exclusion amount could find themselves dealing with unforeseen consequences.
This year, the annual exclusion amount is set at $15,000. Essentially, this means if you were to gift $20,000, the amount above the annual exclusion amount would go against the lifetime exclusion amount. In this example, that means the lifetime exclusion amount is reduced by $5,000 for each $20,000 gift given that tax year.
Taxes begin to apply when the lifetime exclusion amount is exhausted.
The tax law is evolving. It is not permanent and new laws can change how these limitations work. As a result, it is important for those with significant wealth to gift wisely and review their tax savings options with a professional.