When you hear about the existence of the federal gift tax, you may wonder if you can give tax-free gifts to your children. Have you been breaking the law all these years by failing to pay taxes on holiday gifts?
Let’s look at the answer to this question.
Cincinnati Gift Tax: Annual Tax Exclusion
Technically, gifts that you give to your children are taxable. However, there is an annual per person gift tax exclusion.
Using this exclusion, you can give gifts to others totaling as much as $14,000 per person in a year free of the gift tax. There is no limit to the number of people that you can give gifts to tax-free as long as no one person is receiving more than $14,000 in a calendar year.
Unified Lifetime Gift and Estate Tax Exclusion
It is possible to give your children gifts exceeding $14,000 per person in a given year if you use a portion of your unified lifetime gift and estate tax exclusion. This exclusion is something that exists in addition to the per person annual exclusion. In 2014, the amount of Cincinnati gift tax exclusion is $5.34 million.
However, every time you use a portion of your exclusion giving tax-free gifts above and beyond $14,000 per person, per year, you are reducing the amount that will be left to apply to your estate after you pass away.
In addition to these two exclusions, there is an educational exemption. You can pay school tuition for students free of the gift tax. When you pay for tuition using this exemption, you are not using any of your annual exclusion, and you are not using any of your unified lifetime exclusion.
It should be noted that you must pay the institution directly to use this exemption. You can’t just give the money to the student as a tax-free gift. And, this is a tuition only exemption that does not apply to books, fees, and living expenses.
You can pay the medical bills of others, including your children, tax-free without using any of your unified lifetime exclusion or your annual per person exclusion.
This exemption extends to the purchase of medical insurance for the benefit of someone else.
Paying medical bills is the same as paying tuition. You must pay the doctor or facility that is billing the patient. You cannot the give the money to the patient with the understanding that the patient will pay the bills.
Tax Efficiency Strategies
If you are in possession of assets that exceed the amount of the unified gift and estate tax exclusion you may be able to realize tax efficiency through measured acts of tax-free gifting. Take a moment to contact our firm to schedule a consultation if you would like to discuss wealth preservation with a licensed Cincinnati estate planning attorney.