In 2013, the annual gift tax exclusion will increase from $13,000 to $14,000 per year. The annual exclusion gift is the amount of money a person can gift to an unlimited number of people in any one year without reducing his lifetime credit against gift tax. The annual exclusion gift amount is a subject of tremendous confusion and misconception. No other subject raises more questions for me from my clients than the annual exclusion gift.
The federal government imposes a gift tax on certain gifts. The state of New Jersey does not impose a gift tax. Even though there is a federal gift tax, very few people pay federal gift tax. The reason very few people pay gift tax is due to the lifetime exclusion against the tax that we all receive.
The lifetime exclusion is currently $5,000,000. In other words, a person would have to gift more than $5,000,000 before he would ever pay gift tax. In 2013, if the federal government doesn’t act and we go over the “fiscal cliff,” the lifetime credit against gift tax will be reduced to $1,000,000. While $1,000,000 is substantially less than $5,000,000, my guess is, most people won’t gift more than $1,000,000.
So, if a person can gift $5,000,000 without paying gift tax, what is the annual exclusion gift about? Why should I be concerned about only gifting $13,000 a year?
Many people still believe the annual exclusion gift is $10,000, which is what it was for many years. In the recent past, the annual exclusion gift has risen through an inflation rider in the law from $10,000 to $11,000 to $12,000 to $13,000. Next year, as stated, the annual exclusion gift will increase to $14,000.
The annual exclusion gift amount is the amount of money a person can gift without reducing his lifetime exclusion. In other words, if Mr. Smith gifts $13,000 in 2010 to 100 of his friends and family members, he will not reduce his $5,000,000 lifetime exclusion at all; however, if he gifts $13,000 to ninety-nine people and $14,000 to one person, he will reduce his lifetime exclusion from $5,000,000 to $4,999,000.
Only if Mr. Smith were to gift over $5,000,000 in excess of the annual exclusion amount would he ever pay gift tax. If Mr. Smith did gift over $5,000,000 in excess of the annual exclusion amount, then he would pay gift tax on the amounts over $5,000,000.
In other words, if Mr. Smith gifted $5,014,000 in one year to one person, he would pay gift tax on the $1,000 in excess of the lifetime exclusion ($5,000,000) and the annual exclusion ($13,000). Any future gifts in excess of the annual exclusion would also be taxable, since Mr. Smith would have used up his lifetime exclusion.
Because of the lifetime exclusion, I often tell people that gift tax is not a concern for them, and they should stop worrying about gift tax all together. While gifts in excess of the annual exclusion amount do reduce the lifetime exclusion, few people have more than $5,000,000, let alone plan on giving it away.
If you do gift more than the annual exclusion amount to any one person in any one year, then you should file a federal gift tax return; however, no tax is owed. A gift tax return is an extremely simple tax form and is easy to file.
The bottom line is, if you are thinking about making a gift, don’t let the fear of gift tax get in your way. Very few people ever pay gift tax because of the extremely high lifetime credit against the tax.