Gifting - Exclusions and Deductions

Annual Exclusion
In reality, many Americans do not have to worry about the Federal Gift Tax. The annual allowance for an individual is $14,000 or $28,000 for married couples (in 2013). It changes annually. It is good to know, however, that payments made directly to schools (qualified education organizations), medical providers or political organizations do not count toward the gift tax exemption amounts.

Applicable Credit Amount
The applicable credit is a credit that reduces or eliminates tax and can be used for both the estate tax and gift tax. This amount may be used in full while living (gifting) and again in full at death. It is not used twice; this is because taxable gifts are added back to the taxable estate.

You must subtract the unified credit from any gift tax that you owe. Any unified credit you use against your gift tax in one year, reduces the amount of credit that you can use against your gift tax in a later year. The total amount used during life against your gift tax reduces the credit available to use against your estate tax.

The unified credit against taxable gifts is $2,045,800 for 2013 and the applicable exclusion amount is $5,250,000.

Gift Splitting
If you and your spouse make a gift to another person, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must consent (agree) to split the gift. If you do, you each can take the annual exclusion for your part of the gift.

In 2013, gift splitting allows married couples to give up to $28,000 to a person without making a taxable gift. If you gift split, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion.

Example: Harry and his wife, Doris, agree to split the gifts that they made during 2013. Harry gives his nephew, Seth, $21,000, and Doris gives her niece, Sabrina, $18,000. Although each gift is more than the annual exclusion ($14,000), by gift splitting they can make these gifts without making a taxable gift. Harry's gift to Seth is treated as one-half ($10,500) from Harry and one-half ($10,500) from Doris. Doris' gift to Sabrina is also treated as one-half ($9,000) from Doris and one-half ($9,000) from Harry. In each case, because one-half of the split gifts are not more than the annual exclusion, they are not a taxable gift. However, Harry and Doris must file a gift tax return.

Prior Taxable Gifts
Adjusted taxable gifts made after 1976 are added to the taxable estate, resulting in a higher tax base. These are not brought back in a second time to be taxed. The gifts are brought back in "gross up" the estate in order to raise the decedent's estate tax bracket for determining the tentative tax. This is known as the "gross up procedure." After the tentative estate tax has been determined, it is reduced by a gift tax credit related to post-1976 gifts (If the tax paid on post-1976 gifts is greater than the amount that would have been paid under the current rates, then the current rates are applied to re-determine the gift tax credit (this is known as the "deemed paid" gift tax credit).

Education and Medical Exclusion
In addition to the annual exclusion of $14,000 per year, amounts paid on behalf of another person as payment for medical care or tuition to an educational institution can be excluded.

  • The beneficiary need not be a relative.
  • The payment must be made directly to the medical provider or educational institution.
  • Tuition requirement – Amounts paid for room, board and books are not excluded.

Marital and Charitable Deductions
Donor spouses can give unlimited amounts to their spouse, who is a U.S. citizen, during the donor spouse's lifetime, without gift tax. If the recipient spouse is not a citizen, gifts of up to $143,000 (in 2013) may be made per year to the non-citizen spouse, with this amount being indexed for inflation. If the donor spouse makes gifts in excess of this amount to the non-citizen spouse, the donor spouse will use a part of the annual exclusion amount for gift tax purposes, if available, or to the extent it is unavailable, may incur some gift tax.

The fair market value of property donated to a qualified charitable organization is deductible. The deduction is not subject to the 50%/30%/20% ceiling for individuals, rather 100% of the gift value is deductible, regardless of property (ordinary or long term gain) and regardless of charity (public or private). And the entire interest in the underlying property must be donated.

Political contributions are not subject to gift tax.
 

Tax Liability
Related Articles
  1. Investing Basics

    Explaining Risk-Adjusted Return

    Risk-adjusted return is a measurement of risk for an investment or portfolio.
  2. Investing Basics

    Calculating the Margin of Safety

    Buying below the margin of safety minimizes the risk to the investor.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI KLD 400 Social

    Find out about the iShares MSCI KLD 400 Social exchange-traded fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: Guggenheim BulletShrs 2018 HY CorpBd

    Find out about the Guggenheim BulletShares 2018 High Yield Corporate Bond ETF, and get information about this ETF that focuses on high-yield corporate bonds.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares DWA SmallCap Momentum

    Find out about the PowerShares DWA SmallCap Momentum Portfolio ETF, and explore detailed analysis the fund's characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
RELATED TERMS
  1. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  2. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  3. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  4. Gross Exposure

    The absolute level of a fund's investments.
  5. Priori Loss Estimates

    A technique used by insurance companies to calculate loss reserves.
  6. Value Of Risk (VOR)

    The financial benefit that a risk-taking activity will bring ...
RELATED FAQS
  1. Is my IRA/Roth IRA FDIC-Insured?

    The Federal Deposit Insurance Corporation, or FDIC, is a government-run agency that provides protection against losses if ... Read Full Answer >>
  2. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  3. What are common delta hedging strategies?

    The term delta refers to the change in price of an underlying stock or exchange-traded fund (ETF) as compared to the corresponding ... Read Full Answer >>
  4. How does being overweight in a particular sector increase risk to a portfolio?

    An investor who is overweight in a particular sector risks a loss in value for the portfolio if there is a downturn in that ... Read Full Answer >>
  5. What are the primary risks an investor should consider when investing in the retail ...

    The retail sector consists of companies operating in multiple industries such as specialty retail, general retail, food and ... Read Full Answer >>
  6. What risks do I face when investing in the insurance sector?

    Like all equity investments, insurance companies present investors with market risk. Insurance companies, like banks, also ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!