There is a tax on gift giving in the United States, but many people do not pay the gift tax because there are exclusions. You should understand the lay of the land when you are planning your estate, because the gift tax is unified with the estate tax.
Annual Gift Tax Exclusion
There is an annual gift tax exclusion. This allows you to give as much as $14,000 to any number of individuals within a calendar year without incurring any gift tax liability.
We should point out the fact that you do not have to use this exclusion, or any exclusion, to transfer assets to your spouse tax-free. As long as you are married to an American citizen, you can use the unlimited marital deduction to transfer assets to your spouse free of taxation.
Unified Lifetime Gift and Estate Tax Exclusion
In addition to the $14,000 per person annual gift tax exclusion, there is also a unified lifetime exclusion. This exclusion applies to your estate, and it also applies to gifts that you give while you are living.
The amount of this exclusion is $5.43 million in 2015. To understand how these two separate exclusions interface, let’s say that you gave $28,000 to your son on a given day. The first $14,000 could pass tax-free through the utilization of the $14,000 per person annual gift tax exclusion. You could give the remaining $14,000 tax-free using a portion of your $5.43 million lifetime exclusion.
In addition to these exclusions, there is also an educational gift tax exclusion. You can pay school tuition for students tax-free, but this is a tuition only exclusion. It does not include other educational expenses, like fees, books, and room and board.
You should also understand the fact that the institution must be paid directly. If you just give the money to the student with the understanding that he or she will use it to pay tuition, the exclusion would not be applicable.
Health Care Expenses
It is also possible to pick up the tab for health care expenses that are incurred by others without facing a gift tax bill for your troubles. You can use this exclusion to pay for health care insurance as well.
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If you are facing estate tax exposure, there are things that you can do to reduce the burden and preserve your wealth for the benefit of your loved ones. One strategy would be the utilization of the $14,000 per year, per person gift tax exclusion.
You could potentially transfer a significant amount of money tax-free if you were to use this exclusion over an extended period of time.