Throughout the year, you likely give gifts to family and friends for many different reasons. While most of these gifts are simple and require no action on your part as it pertains to the IRS, more expensive gifts may be subject to the federal gift tax. Gifts that are excluded from the federal gift tax are called an annual exclusion gift. But, while you may have heard of the annual exclusion gift, what exactly is it and how can you ensure that your gifts are covered by this exclusion?
The Annual Exclusion Gift
Each year, the Internal Revenue Service (IRS) sets an amount at which any gifts will be excluded from paying any federal gift taxes. These amounts are typically published in early November of each year. Any gifts to a person that exceed that amount will be subject to federal gift taxes. Any gifts that are that amount or less will be excluded from such taxes. While the rule itself seems rather cut and dry, there are certain circumstances in which you may qualify for an exclusion of the federal taxes on gifts even if the gift exceeds the amount specified by the IRS. In 2012, the annual exclusion gift amount was $13,000. The following year, the amount was raised to $14,000, a number that has remained consistent since 2013.
How to Get an Annual Gift Exclusion
Each year, each person receives their own separate exclusion amount that they can provide in gifts. In this instance, a gift is considered anything given in which nothing is received in return. There is no limit on the number of people that can be gifted and come under the annual exclusion gift rules. If you are gifting with a spouse, the couple can combine their gift exclusion amounts to stay under the exclusion limit. However, any gifts that are split between a couple must be reported to the IRS by Form 709 of the United States Gift Tax Return.
If you are gifting to a spouse that is a United States citizen, that gift is automatically excluded from any federal gift taxes. But if you are gifting to a spouse who is not a United States citizen, there is a separate annual exception amount, an amount that has steadily grown over the past eight years. That amount was $134,000 in 2010, $136,000 in 2011, $139,000 in 2012, $143,000 in 2013, $145,000 in 2014, $147,000 in 2015, $148,000 in 2016, and is $149,000 in 2017.
If you are gifting to someone who is not your spouse, the amount remains $14,000 but that is a number that is combined among the gifts given to that person throughout the year. In most situations, any gifts to an individual other than a spouse that exceed $14,000 in total will be subject to federal gift taxes but there are certain instances where you may qualify for an exclusion, even if the amount gifted exceeds $14,000. Whether you qualify for such an exclusion or not depends on two factors; how the accounts are titled and whether the gifts are split between spouses.
If the gifts came from a marital joint account, the gift can be split between the spouses, cutting the gift amount in half for each spouse. Many times, this can make the gift non-taxable. If the account used for the gift is in just one of the spouse’s names, you must decide whether or not you want to split the gift. If you decide not to split the gift, it will be taxable and you will need to report it as a taxable gift to the IRS on Form 709. If you decide to split the gift, you will still have to report the gift to the IRS on Form 709.
Any gift given throughout the year that exceeds the annual exclusion amount of $14,000 is subject to federal gift taxes. However, there are certain circumstances in which you may give a gift totaling over the annual exclusion amount but still may not be required to pay taxes on the amount. Like estate planning, gift taxation planning is essential if you are planning on gifting over the annual exclusion amount to anyone. To ensure you have the right plan for your gift taxation, come see the experts at France Law Firm.