If you are making a gift in 2016, you may be interested in how to comply with the annual gift tax exclusion. While a gift is taxable by the United States Government unless one of the exceptions applies, a gift is not considered taxable if it does not exceed the annual gift tax exemption amount. See gifts and gifting. For 2016, the amount you can gift to any person tax free is 14,000.00 USD. If you are married, you and your spouse may gift a total of 28,000 USD to any person or donee by gift splitting.
The gifting limits for 2015 are the same as for 2016. In 2015, you could gift to any person tax free the amount of 14,000.00 USD and a married couple could gift a total of 28,000 USD to any person or donee.
As mentioned above, there are several exceptions to the gift tax rule. Some exceptions that are not taxable gifts include: a. gifts to your spouse; b. payment of medical expenses or tuition expenses for another person; and c. gifts to political organizations. Of course, you can also make gifts to qualified charities, such as organizations that have 501c3 status with the IRS. See charitable giving for more information.
Making a mistake on a taxable gift can be extremely costly, especially if your failure to follow the rules on gifting results in an IRS audit or an unexpected tax bill that may be subject to late fees and penalties. Whether you are making a gift as part of a strategy to reduce estate taxes that would otherwise reduce the amount your heirs or beneficiaries will inherit or are simply making the gift because you want to do it, irrespective of estate taxes, the most prudent first step is to let your CPA or tax professional know in advance. Find a tax professional. Making a gift should be a positive experience for the donor. With proper advance planning, you can take advantage of all the benefits associated with the federal gift tax exemption without losing sleep over tax laws.
Reasons You May Want To Start Gifting
There are many reasons to engage in gifting. However, in terms of estate planning, the primary reason for gifting is to reduce the size of your estate as part of a strategy to reduce estate taxes. By passing more of your assets to your intended heirs and beneficiaries through gifts during your lifetime, you may be able to reduce the amount of your estate that would otherwise be used to pay federal and state estate taxes. A gifting strategy can therefore ensure your children, grandchildren or other intended beneficiaries receive a greater legacy from you while the government receives less.
While many Americans are not concerned about estate taxes because of the sizeable estate tax exemption amounts at the federal level, it is important to be aware that your estate could still be subject to estate taxes at the state level. Many states levy estate taxes, inheritance taxes or both, and the exemption amounts are often much lower in these states than the federal estate tax exemption amount. For more information on the states that charge estate tax and how the exemption amounts vary from state to state, see Where Dying Really Costs You.
Income Planning Before Gifting
While the urge to give away money and other assets during your lifetime may be a strong one, especially if you know your gift can make a difference, it is important to make sure you will not run out of money. If you have not had an income plan prepared for you or met with your financial advisor within the past year or two, consider having a financial planning review before making a substantial gift. Taking advantage of current gifting limits can be an essential part of making your estate plan work, depending on the size of your estate. Nevertheless, financial requests from children, other family members, churches or charities can put vulnerable seniors at risk unless a sound income plan is in place. To learn more, see financial planning.
To explore the 2017 gift tax exemption, the 2016 gift tax exemption, and related estate planning tax issues, such as the generation skipping transfer tax or GSTT, refer to our estate tax information page.