There is a gift tax in the United States, but you may not have to pay it because of the annual gift tax exclusion. Each year you can give as much as $14,000 to any number of people tax-free. This $14,000 figure is accurate in 2014, but is subject to change to account for inflation.
What would happen if you gave more than $14,000 to any one person in a calendar year? You could give the gift tax-free, but you would be using a portion of your lifetime unified gift and estate tax exclusion.
Unified Lifetime Exclusion
In addition to the annual gift tax exclusion, there is a unified lifetime gift and estate tax exclusion. The amount of this exclusion in 2014 is $5.34 million.
If you give a gift to someone that exceeds $14,000 in a year, you would use a portion of your $5.34 million lifetime exclusion in order to give the gift tax-free.
Most people are not going to give gifts throughout their lives exceeding $5.34 million in total value. Therefore, the majority of gifts that are given in the United States are going to be given tax-free.
Tax Efficiency Strategies
Of course there are high net worth individuals that are in possession of assets that exceed $5.34 million in total value. If you are in this position, you must seek out tax efficient strategies when planning your estate.
The utilization of the annual gift tax exclusion can be part of the plan. Let’s explain by way of example.
Suppose you are married and you have three children. Both you and your spouse are entitled to utilize this $14,000 annual exclusion. You have a $14,000 exclusion, and your spouse has his or her own $14,000 exclusion.
Therefore, with your spouse, you two could give as much as $28,000 to any number of individual gift recipients within a calendar year free of the gift tax. These gifts would not impact the amount of your available unified gift and estate tax exclusion; the two exclusions exist completely separate from one another.
For the purposes of this example we will say that all three of your children are married. As a couple you could give $28,000 tax-free to each husband and each wife within a calendar year, equaling $56,000 a couple.
Since you have three married children, you would be transferring $168,000 tax-free each year. This in itself is providing you with tax efficiency, but you are also reducing the value of your estate as you give these gifts. As a result, there will be less tax exposure when your estate is being transferred after you pass away.
This is a brief look at the annual gift tax exclusion. If you have any questions about transfer taxes, don’t hesitate to contact our firm to schedule a consultation.