Take Advantage of the Gift Tax Annual Exclusion

Take advantage of the federal gift tax annual exclusion. As illustrated below, taxpayers can transfer substantial amounts free of gift taxes to their children or other donees through the proper use of this exclusion. The amount of the exclusion is currently $11,000.

The exclusion covers gifts an individual makes to each donee each year. Thus, a taxpayer with three children can transfer a total of $33,000 to them every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there is no need to file a federal gift tax return. If annual gifts exceed $11,000, the exclusion covers the first $11,000 and only the excess is "taxable." Further, even "taxable" gifts may result in no gift tax liability thanks to the unified credit (discussed below). (Note: this discussion is not relevant to gifts made by a donor to his spouse because these are gift tax-free under separate marital deduction rules.)

If the donor of the gift is married, gifts to donees made during a year can be treated as "split" between the husband and wife, even if the cash or gift property is actually given to a donee by only one of them. By gift-splitting, therefore, up to $22,000 a year can be transferred to each donee by a married couple because their two annual exclusions are available. Thus, for example, a married couple with three married children can transfer a total of $132,000 each year to their children and children-in-law ($22,000 for each of six donees).

Where gift-splitting is involved, both spouses must "consent" to it. Consent should be indicated on the gift tax return (or returns) the spouses file. IRS prefers that both spouses indicate their consent on each return filed. (Since more than $11,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $22,000 exclusion covers total gifts. Please contact us regarding the preparation of a gift tax return (or returns) if more than $11,000 is being given to a single donee in any year.