What’s the Difference Between the Annual Gift Tax Exclusion and the Lifetime Gift Tax Exemption?

Jan 10, 2015 By Evan Nielsen In Taxation No Comment Tags : , , ,

It’s the holiday season, the time for gift giving. It may also be the time to ask yourself, are you fully informed as to what can you gift to friends and family without a tax consequence? Gift taxes, with their exclusions and exemptions, are often some of the most misunderstood taxes. The following are some quick rules and guidelines to help keep you in the know.

What is a Gift and What is Not?

According to the IRS, a gift is any transfer to an individual, either directly or indirectly, where full consideration is not received in return. Most of us know that giving cash is included in this definition, but so is much, much more. Transfers of personal property are considered gifts, whether you give the property outright, or whether you add another’s name to the title of the property. Also, adding someone to a bank, brokerage, or some other similar type of account is considered a gift.

What doesn’t count as a gift for tax purposes? Transfers to your spouse are not gifts. Gifts to qualified charities are not gifts. Payments for another’s tuition or medical expenses are not gifts.

What is the Annual Gift Tax Exclusion?

The annual gift tax exclusion allows you to give away up to $14,000 to any one individual in any one given year free from tax. While this amount can change annually, the amount has been set for 2014 and 2015 at the $14,000 level.

What is the Lifetime Gift Tax Exemption?

The lifetime gift tax exemption is the total amount that you can give away over your lifetime to any number of people without tax. There’s no specific dollar amount cap to the exemption. Instead the lifetime gift tax exemption is tied directly to the federal estate tax exemption so that any gift amount over that of the annual gift tax exclusion above will be subtracted from your estate tax exemption when you die. This is easier to understand in practice, so let’s look at an example.

  • The 2014 federal estate tax exemption is $5,340,000.
  • You gift $120,000 to your child in 2014.
  • $14,000 of the $120,000 gift falls under the annual gift tax, leaving $106,000 in a taxable gift.
  • Your estate tax exemption is then reduced by the $106,000 taxable gift, leaving you $5,234,000 you are able to gift in subsequent years up until your death.

If you have questions regarding the gift tax, its annual exclusion or lifetime exemption, the professionals at Nielsen Law Group can help you today. Call (480) 888-7111 or submit a web request here.