It’s the Season of Giving, and some of my clients are thinking about giving money to their family members. As I have said in the past, no single issue garners more attention from more of my clients than gifting. My client will ask: “We can only gift $10,000 a year, right?”
I’m never quite sure what the client believes will happen if they gift over the amount they believe they can gift. And, by the way, that “amount” varies from $10,000 to $14,000 a year, depending upon how informed the client is.
These amounts that clients mention to me are what is technically called the annual exclusion gift amount. Over the past decade, the annual exclusion gift amount has increased from $10,000 a year to $14,000 a year. The annual exclusion will continue to increase as time passes because it is indexed for inflation.
But what does the annual exclusion amount really mean? To understand that question, you have to understand the basics about gift tax.
The United States government imposes a tax on all gifts from one individual to another. New Jersey does not impose a gift tax. (It is my understanding that some states also impose a gift tax, but not New Jersey, and since I only practice law in New Jersey, I only worry about New Jersey law.)
The fact that the United States imposes a gift tax on all gifts that an individual makes may sound scary; however, that rule has an exception so big that it is truly a situation in which the exception swallows the rule. Every person receives a $5,000,000 exemption from gift tax. This exemption, like the annual exclusion amount, is indexed for inflation. Currently, a person can gift $5,250,000 without paying gift tax.
Let’s pause here for a moment. Do you have $5,250,000 in assets? Most people do not, and if you do not, you never have to worry about paying gift tax because you could gift every single asset that you own and never pay gift tax. You have to gift more than $5,250,000 in order to ever have to worry about paying gift tax.
If that weren’t enough, there are certain additional exclusions to federal gift tax. One of those additional exclusions is the annual exclusion gift amount. In other words, the annual exclusion amount, currently $14,000, isn’t a limitation on the amount a person can gift tax free; it is an enhancement to an already large ($5,250,000) lifetime exclusion.
The annual exclusion exception to gift tax permits every taxpayer to gift $14,000 a year to an unlimited number of people without reducing their lifetime exemption amount, currently $5,250,000. A married couple can gift twice the annual exclusion amount, or $28,000, to an unlimited number of people without reducing their lifetime exemption amount. There is no requirement that the person who receives the gift be related to the person making the gift.
So, Mr. and Mrs. Smith could gift $28,000 to each of their children, each of their children’s spouses, each of their grandchildren, and every friend they have or every person they ever met without reducing their $5,250,000 life exclusions. Mr. and Mrs. Smith each receive a $5,250,000 lifetime exemption from gift tax, so between the two of them, they could gift $10,500,000 without paying gift tax.
If Mr. Smith were to gift $15,000 to one of his children in one year, he would reduce his lifetime exemption from $5,250,000 to $5,249,000. But unless the Smiths were to gift more than $10,500,000, they would never, under any circumstance, have to worry about gift tax.
So, feel free to give this Christmas Season.