Gift Tax Annual Exclusion

Gift Tax Annual Exclusion Demystified…..Maybe ?

Gift Tax Annual Exclusion

The gift tax annual exclusion are one of the most misunderstood and complicated concepts of taxes. The most common confusion surrounds who pays the gift tax.  With that said I want to define gift taxes from the donee (receiver) and the donor (giver) in order to further your understanding. 

The donee (receiver) of a gift is not taxable (Tax Code Sec 102(a) and IRS Publication 525).  However, income earned from the gift after you receive it is taxable.  For example, if the gift you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable to you.

How to Figure the Gift Tax Annual Exclusion

The donor (giver) of a gift is subject to the tax and has to report it to the IRS under certain circumstances.  Technically, relatively small gifts can completely avoid gift tax.   Any one person can gift someone up to the allowable gift tax annual exclusion, which is $14,000 for 2015, and not incur a tax or any filing requirement.  

A married couple is eligible to give the gift tax annual exclusion from each donor for a total of $28,000 for 2015.  As a result the effective gift tax annual exclusion limit from one couple to another couple would be $56,000 ($14,000 x 4).  Anything over that amount is possibly subject to a tax and needs to be reported on the Gift Tax Return. 

Even if a gift is technically subject to a gift tax, the liability computed on the gift tax return can usually be avoided by claiming the lifetime credit.  If this is a possibility for anyone giving you gifts during a single year please advise the individual to seek tax planning advice. 

General Rules

The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.

  1. Gifts that are not more than the annual exclusion for the calendar year.
  2. Tuition or medical expenses you pay for someone
  3. Gifts to your spouse.
  4. Gifts to qualifying charities are deductible from the value of the gift(s) made.

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