IRS Tax Guidelines for Personal Gifts
The Internal Revenue Service allows for tax-free annual gift transfers. The IRS, however, wants to ensure that these gift transfers are not an attempt to subvert the estate tax. As a result, donors face limitations on the value of gifts they may transfer tax-free each year and on the lifetime value of tax-free transfers.
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Function
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The IRS allows tax-free gift transfers of up to $13,000 annually to any person for any reason. This $13,000 limitation is linked to inflation and is periodically increased, typically after several years and in $1,000 increments. For married couples, there is a $26,000 annual limit.
Features
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The $13,000 limitation is applied on a per-person basis. This means that a donor can gift $13,000 to one person or $130,000 in 10 equivalent gifts to 10 people without paying tax. Gifts may either be of cash or property. If property is gifted, it must be valued at fair-market value, or the value the property would change hands for if traded between a buyer and seller at arm's length. If the value of the property is not readily determinable, the IRS may require you to obtain a qualified appraisal.
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Unified Credit
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The IRS allows a lifetime "unified credit" against taxable gifts in the amount of $345,800. This unified credit is equal to the amount of tax on $1 million of taxable gifts and effectively excludes the first $1 million of taxable gifts from tax. The value of any gifts above annual exclusion limits are first used to reduce the amount of the unified credit. For example, a gift of $14,000 to one individual effectively reduces the donor's remaining lifetime exclusion from $1 million to $999,000.
Exceptions
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Several gifts are not considered taxable gifts, regardless of the amount gifted. Most commonly, donors are allowed unlimited lifetime transfers to a spouse. Secondly, an educational exclusion exempts the payment of educational tuition. Typically, the gift must be made directly to the educational institution. Payment of medical bills is also exempted from annual and lifetime exclusions. Finally, gifts to charities or political organizations are not considered taxable gifts.
Warning
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Generally, you are only required to file a gift-tax return in years in which you exceed your annual exemption. Many experts, however, recommend that you file a return for any year in which you sell a substantial asset to a relative. An example of such a transaction would be the sale of a house to a son or daughter. If a gift tax return is not filed, at the donor's death, the IRS may audit the donor's estate and contest that the house was not sold at full fair-market value and that the difference represents a disguised gift.
Gift tax returns are filed on IRS Form 709: United States Gift Tax Return.
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