The IRS gift tax code can be so complicated for some that it discourages them from gifting. If you read the actual code itself, it can be confusing, but the basic rules aren’t that hard to figure out, and those are the ones with which you should be concerned. Provided your gifts fall under certain restrictions, you won’t be dinged when tax time comes around.
Gifts That Are Not Subject to Gift Tax
Provided you give your gift to the right person or organization, you won’t be subjected to gift tax, no matter how much the dollar or good amount is. If you give money to your spouse or a political organization, you will not be taxed. If you help someone with his or her medical bills or college tuition, this, too, is exempt from gift tax. Finally, each year the IRS determines the maximum amount you can give and still be excluded from the special tax. Provided you stay under this number, you’ll be safe.
The annual exclusion amount from 2014 to print date is $14,000, and this number is raised when necessary to account for inflation. For example, from 2002 to 2005, you could not give more than $11,000 in gifts without incurring gift tax. This number was increased by $1,000 from 2006 to 2008, another $1,000 from 2009 to 2013, and to its current rate today in 2014. If you exceed the designated amount, you are required to report your gift on your taxes by filling out IRS Form 709.
To avoid this, don’t give more than the annual exclusion amount. An infographic provided by Northeastern’s online MST degree program provides a loophole on this rule: The $14,000 is per person, not your total annual gifts, so you can give out a ton of money to people, as long as you don’t give them more than $14,000 individually. If you try to sneak in an extra $10,000 to someone, you could pay a penalty of up to 40 percent, so it’s not worth it to try to cheat Uncle Sam, but there’s another catch.
Lifetime Gift Exclusion
As of 2014, you won’t owe your gift tax until you’ve given more than $5.34 million in gifts over your lifetime, and that will take a long time unless you’re a millionaire who gifts substantial amounts of money and goods. Once you’ve reached this threshold, you will have to pay your gift tax on any infractions, and you still have to file your gift tax return each April. All of this seems easy to accountants, but they’ve taken the time to get an online masters degree in accounting from UAB.
To the layperson, it’s a little more complicated, but it boils down to this: At press date, make certain you don’t give any one person more than $14,000 in cash and/or goods annually. If you give a person more than that, you may owe gift tax up to 40 percent. File IRS Form 709 with the following year’s tax return, but don’t worry about paying gift tax until you’ve gifted $5.34 million in your lifetime. Remember, the $14,000 includes cash and goods, so make certain you include both in your annual calculations.