How Much Money Can You Give Each Year to a Person Tax Free?
It is better to give than to receive. But the IRS makes giving a lot less fun over a certain amount. Congress has long imposed limits on transfers of property without fair value compensation. Except for gifts to qualified charities, the IRS imposes a gift tax on transfers over $13,000 per person in a given year per giver. Congress also imposes a lifetime cap on tax-free gifts of $1 million--an exemption that Congress has raised several times over the years.
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History
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Congress imposed the first gift tax in 1924, repealed it in 1926 and imposed it again in 1932, during the dark days of the Great Depression. The Congressional deliberations of 1932 referred to a number of high profile tax-free gifts, including two individuals who made $100 million and $50 million in gifts respectively, according to a white paper from the U.S. Department of the Treasury. In its 1932 incarnation, Congress imposed a graduated tax scale that started at 0.75 percent up to a maximum of 33.75 percent, but allowed an annual exclusion of $5,000 per recipient and $50,000 for all gifts given over a lifetime. Currently, taxes on gifts above the current annual exclusion of $13,000 are taxed at income tax rates, with the tax paid by the giver.
Purpose
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The primary purpose behind the gift tax in the United States is to support the collection of estate taxes. Otherwise, wealthy individuals could simply give away money to family members prior to their deaths, avoiding estate taxes altogether. With the gift tax law, Congress is balancing the natural desire of family members to pass wealth on to younger generations and the utility of paying for education and medical bills against the need to raise revenue and the desire of Congress to limit the accumulation of large amounts of wealth on a hereditary basis.
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Non-Taxable Gifts
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Certain gifts are not considered taxable transfers by the IRS. These include gifts below the annual exclusion of $13,000 (as of 2010), tuition or medical expenses paid directly to the educational or medical institution on another person's behalf, gifts to a spouse, gifts to political organizations and gifts to charities.
Exclusion Amounts
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The gift tax is applied to gifts over the annual exclusion limit to any given person. However, the gift exclusions for a husband and wife are computed separately: A married couple can combine their gifts for a total of $26,000 in tax-free gifts as of tax year 2010--a technique known as "gift-splitting." However, both spouses must agree to giving the asset away.
Filing
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You must file an IRS Form 709 with your individual income tax return if you have given one or more persons more than the annual exclusion for the year, if you and your spouse are splitting a gift or if you have given someone a gift that they cannot benefit from or enjoy until some time in the future.
Applications
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Many affluent individuals use strategic gifting in order to lower their taxable estate for estate tax purposes. For example, they will give up to the annual exclusion amount to children and grandchildren and to trusts established for their benefit. Gifting can be a useful asset protection strategy as well, since assets transferred to children and grandchildren are not attachable by creditors. Certain restrictions, known as "generation-skipping transfer taxes" may apply to gifts made to grandchildren. The generation-skipping transfer tax has been eliminated for tax year 2010, however.
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References
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