It’s December. The holiday season is a time of families and gift-giving. It is also the time of tax planning and annual exclusion giving.
The annual exclusion refers to the amount a person can give away, to as many people as they wish, without the gift being considered “taxable” for purposes of the Federal Gift Tax. Under Section 2503(b) of the Internal Revenue Code, in 2012 each person may give (cumulatively throughout the year) up to $13,000 to anyone else without the gifts being treated as taxable. The amount of the annual exclusion is determined by adjusting the exclusion for the 1997 base year of $10,000 for inflation. The IRS has already announced that for 2013 (Rev. Proc. 2012-41), the annual exclusion will be $14,000.
So a couple with two children could give away $52,000 to their children (each parent giving each child $13,000) this year without any of those gifts being considered taxable. If the children were married themselves, the parents could give away $104,000 in 2012. The exclusion does not require any relationship between the donor (giver) and the donee (recipient), so gifts to a friend (or even a stranger) are not a problem.
Generally, each donor has to make his or her gift from his or her own assets. However, if the couple is married, one spouse can allow the other to use his or her exclusion by “gift-splitting”. So, instead of each spouse giving $13,000, one spouse can give $26,000. This would generally occur when the spouses are using one of their separate assets to make the gift. Beware, however, that to “gift-split”, each spouse must file a Federal Gift Tax Return.
In addition to the Annual Exclusion, under Section 2503(e), a donor may make unlimited gifts in the form of qualified transfers for tuition or medical expenses. A qualified transfer for tuition is a payment made directly to a qualifying educational organization for the tuition of a full or part-time student. The exclusion does not apply to non-tuition expenses such as room and board. A qualified transfer for medical expenses is again the direct payment of the expense. The exclusion applies to medical expenses for the diagnosis, cure, mitigation, treatment or prevention of disease, but also includes amounts paid for medical insurance for the donor. However, it does not apply to amounts which would be reimbursed by the donee’s insurance. These unlimited exclusions from gift tax can provide valuable tax planning opportunities to donors.
Annual exclusion gifts and qualified transfers for tuition and medical expenses can be a valuable part of a person’s estate and wealth preservation planning. However, it is important to understand the overall impact of these gifts on your estate plan, your taxes and tax reporting, and your short and long term financial situation. As such, it is always a good idea to discuss these types of gifts with your Attorney, Accountant and Financial Advisor before taking action.