When you hear about the gift tax, you may wonder if you have failed to pay a necessary tax when you have given gifts to your children. In fact, it is unlikely that you have ever given a taxable gift, even though there is a gift tax.
There are gift tax exclusions. They allow you to give gifts up to a certain amount before the gifts would be taxable. One of them is the lifetime unified gift/estate tax exclusion.
The gift tax and the estate tax are unified. The amount of the unified exclusion in 2014 is $5.34 million. If you gave $5.34 million in tax-free gifts while you are living using this lifetime exclusion, there would be nothing left to apply to your estate. As a result, all of your estate would be subject to the estate tax.
Annual Gift Tax Exclusion in Davenport Iowa
In addition to this lifetime unified gift and estate tax exclusion, there is also an annual per person gift tax exclusion. The amount of this exclusion at the present time is $14,000.
Each year you can give $14,000 to any number of individuals free of the gift tax. If you wanted to give more than $14,000 to someone tax-free, you could use a portion of your unified lifetime exclusion.
To explain by way of example, let’s say that you gave $354,000 to your son in 2014. The first $14,000 could be given using the annual gift tax exclusion. That leaves $340,000 that would be taxable.
Your lifetime gift and estate tax exclusion is $5.34 million. As a result, you could give the $340,000 tax-free. After doing this, your remaining available unified gift and estate tax exclusion would be $5 million.
There is another type of gift that you can give to your children completely tax-free without using any of your unified exclusion or your annual per person exclusion.
Under Internal Revenue Service regulations, you may pay the school tuition of a student as a gift free of the gift tax. You can pay tuition tax-free for any number of students, and the total expenditures can equal any amount of money.
You do have to pay the schools directly to utilize this educational exemption. And, it does not extend to the purchase of books and the payment of fees. It doesn’t extent to room and board either. This is a tuition-only gift tax exemption.
You can also pay medical bills for others free of the gift tax without using any of your annual exclusion or your lifetime exclusion. This exemption extends to the purchase of health insurance for the benefit of someone else.
It should be noted that the recipient of a gift does not have to report this gift as taxable income. It is the giver of the gift that is potentially exposed to taxation in the form of the gift tax.