Understanding the Federal Gift Tax

Do you know that there is a gift tax in the United States? Before you start to get worried about all the gifts that you have received over your lifetime without paying any taxes, it is unlikely that you violated any laws.

We have a federal estate tax, but most people do not have to pay it because there is a large exclusion. This is the amount that can be transferred before the tax applies.

At the time of this writing in 2019, the exclusion is $11.4 million. Each year there are adjustments to account for inflation so the figure will be somewhat higher in 2020. To give you an idea of what to expect, it was $11.18 million in 2018 before the 2019 adjustment was applied.

To avoid estate taxes people used to give gifts to their loved ones before they die. However, a gift tax has been in place since 1932, and during the 1970s, it was unified with the estate tax.

As a result of the unification, the $11.4 million exclusion that we have this year is a unified credit that encompasses large gifts that you give during your life along with the estate that will be transferred to your heirs after you are gone.

Additional Gift Tax Exclusions

In addition to this unified lifetime gift and estate tax exclusion, there are some other gift tax exemptions you can use.

There is a $15,000 per year, per person gift tax exclusion that allows you to give this much to any number of gift recipients within a calendar year free of taxation. To be clear, this exemption sits completely apart from the unified exclusion. So you could give $15,000 each to 20 different people in the same year without using any of your large lifetime exclusion.

People who are exposed to the estate tax can obviously use this exemption to give direct gifts. That being said, it can also be used to fund certain types of trusts and to facilitate tax efficient transfers among members of family limited partnerships.

School Tuition and Medical Expenses

There are two other types of gifts that can be given free of the gift tax. If you want to pay school tuition for students, you can do so in a tax-free manner, and there is no limit to the amount that you can spend. However, this is a tuition-only exemption that does not extend to books, fees, and living expenses and the gift must go directly to the school.

That’s the bad news, but the good news is that you could use your $15,000 per person annual gift tax exclusion to provide extra support. And, if you are married, you and your spouse could join forces to give up to $30,000 per person to students or anyone else for that matter.

The other exemption gives you the ability to pay medical bills for others free of taxation. This exclusion extends to the payment of health care insurance premiums.

Attend a Free Seminar

We are holding a number of seminars over the coming weeks and months, and this is a great way to absorb a treasure trove of information without making any firm commitments. There is no admission charge, but we ask that you register in advance so that we can reserve your seat. To get all the details, visit our seminar schedule page.

We Are Here to Help!

If you are past the point of information gathering, our doors are open. You can send us a message to request a consultation appointment, and we can be reached by phone at 606-324-5516 in Ashland, Kentucky, or 859-372-6655 in Florence, Kentucky; and our number in North Carolina is 704-944-3245 (Charlotte, NC and Huntersville, NC).