Here are some interesting tidbits about the annual gift tax exclusion:
1. No gift taxes are imposed on the first $14,000 in gifts that you make to any person during 2013. This exclusion from federal gift taxes is known as the "annual gift tax exclusion." This exclusion is indexed for inflation so that the amount will vary from year to year in $1,000 increments. Originally, the exclusion amount was $10,000. In 2002, it was increased to $11,000. For 2006, 2007 & 2008, it was increased to $12,000. And, for 2009, 2010, 2011 and 2012, it was increased to $13,000. Now, for 2013, it has been increased to $14,000.
2. This exclusion applies only to gifts of a present interest. In other words, the recipient (donee) must be able to use and enjoy the gifted property immediately without any strings attached. There are certain exceptions, however, where the present interest requirement does not apply, such as gifts to a 529 plan where the money will be used for future tuition payments.
3. This annual gift-tax exclusion amount applies to every person to whom you make a gift during the year. For example, if you give $14,000 to Harry and $8,000 to Mary during 2013, no gift taxes are due. However, if you give $14,001 to Harry and $8,000 to Mary during 2013, the $1 given to Harry in excess of the annual exclusion amount is subject to the federal gift tax. (But see gift-splitting between spouses discussed below.)
4. If you make gifts to any person during a calendar year that exceed the annual gift tax exclusion (i.e., the $1 to Harry during 2013), you are required to file a federal gift tax return (Form 709) . Form 709 is required to be filed for each calendar year that a taxable gift is made, and must be filed by April 15th of the following year.
5. If you are married, both you and your spouse are entitled to the annual gift tax exclusion. Both of you could, for example, give $14,000 to, say, your daughter during 2013, for a total of $28,000, without either of you having to file a gift tax return. Think of the planning possibilities here. Assuming for the moment that you have a married daughter with two children, you and your spouse could each give your daughter, her husband, and each of their children $14,000 during 2013. That's a total of $56,000 from each of you - or a combined amount of $112,000 - that could be transferred to them without paying any federal gift taxes. Remember, too, that the recipients of your gifts do not have to pay any gift taxes, or income taxes, or any other taxes on those gifts.
6. In our example above, we sort of implied that you would give $56,000 to your daughter, her husband, and their two children ($14,000 x 4) and your spouse would do the same. But, what if your spouse doesn't have the money to give to them? In that case, you and your spouse could elect to treat all gifts made by either of you as made 1/2 by each of you, regardless of whom actually gave the money.
7. Remember, too, that the annual gift tax exclusion applies to gifts of property as well as gifts of money or cash.
8. On further point. Gifts from one spouse to another do not fall under these annual gift tax exclusion rules. That's because the gift tax laws totally exempt any and all gifts from one spouse to another from any gift taxes. This is known as an "unlimited marital deduction." You should be aware, though, that there is an exception for so-called "terminable interest" gifts and there is a special limitation for gifts to spouses who are not U.S. citizens. For more information on this, please take a look at the instructions for Form 709 [United States Gift (and Generation-Skipping Transfer) Tax Return].
About Michael Pancheri, Trust & Estate Attorney, Canton, Connecticut