Gifting - Exclusions and Deductions
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.
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.