Monday, November 4, 2013

Gift Taxes: Annual Exclusion versus Lifetime Exclusion

Reviewing headlines posted in an email summary of important news in the world of estate planning, one caught my eye.  Gift tax limits to increase in 2014 per an IRS announcement.

What -- I thought the amount was going to remain the same in 2014, what's going on?  This is what immediately popped into my mind.

As I dug into the article clarity hit.

Oh, the lifetime gift tax exemption is increasing in 2014, not the annual gift tax exemption.  Got it! And then I realized, this is the type of news that makes sense to me, but not many of Americas middle class. Annual exclusion, lifetime exclusion, what....?  I have given enough seminars to know this is the type of distinction that makes people roll their eyes and throw their hands up on frustration.

Here is my breakdown:

  • The annual gift exemption is the amount any one person can give another person in one calendar year and not worry about telling the IRS.  In 2013 that amount is $14,000, and it will remain the same in 2014;

  • The lifetime gift tax exemption is the amount any one person can leave over a lifetime of gifting and avoid a tax if the credit allotted by the IRS is used.  In 2014 it will increase to $5.34 million, and the amount in excess would be taxed at  rate of 40%;

  • A gift occurs when one person gives another property and receives little or nothing in return.  See the IRS web site for more detail on what is a gift.  All too often I hear the comment, we sold the cabin for $1.  I immediately this, oh the IRS is not going to agree that it was a sale, it was a gift!
Keep in mind there are always exceptions, this is the tax code we are talking about.  Married couples, gifts paid directly to colleges or medical facilities, and of course donations to charity all offer avenues to pass more assets than the limit.  

The vast majority of my clients do not need to focus on the lifetime exclusion as they will not have millions to pass on. However, those annual limits pop up more often than they would guess.  Adding an adult child to your bank account so that he or she can write checks if you are ill -- the IRS may view that as a gift.  Including your child's name on the deed to vacation property?  Another chance for the IRS to call it a gift -- meaning a tax was owed if the annual exclusion was triggered.

Remember - a blog is not legal advice, but rather a forum to prompt thought and discussion.  Please see a lawyer in your state for advice specific to your situation.  Thanks for reading!

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