The annual gift tax exclusion refers to the amount of money or property that the IRS allows American taxpayers to give away each year without having to pay taxes on it. In 2010, the IRS allows individuals to give $13,000 US Dollars (USD) to any other person without being subject to gift tax. A couple could give a total of $26,000 US Dollars (USD) to any other person, provided that they file a joint tax return. In this case, the gift is split between the two spouses.
Gifts from one spouse to another are not subject to the gift tax, so spouses can give money and property to each other without any tax liability. Charitable gifts are also excluded from the gift tax. Contributions made to a 529 educational savings plan by a grandparent for a grandchild are considered gifts, and are subject to the gift tax exclusion limit. However, tuition payments made directly to an educational institution on behalf of someone else are not taxable.
The unified credit is a tax credit that exempts the first $1 million US Dollars (USD) in gifts over a person’s lifetime or at their death. Gifts that are more than the annual exemption of $13,000 US Dollars (USD) are subtracted from the unified credit until the $1 million US Dollars (USD) threshold is reached. This credit has the effect of eliminating the estate tax for the first $1 million US Dollars (USD) of a person’s estate, whether that estate is passed on during the person’s lifetime or upon their death.
People often use the gift tax exclusion as an estate planning tool. It is used to give away assets during a lifetime which, if they were left to heirs at the time of death, would be subject to estate tax. Money or property given to a trust is considered a gift, so trusts need to be carefully planned to make optimum use of the gift tax exclusion and unified credit.
The giver of the gift, not the recipient, is required to pay the gift tax. A gift tax exclusion form must be filed with the IRS for any gifts exceeding the exclusion amount. IRS Publication 950, Introduction to Estate and Gift Taxes, provides detailed information on the gift tax exclusion. Gift tax return IRS Form 709 must be filed by the donor for any gift of more than $13,000 US Dollars (USD)to any one person that was not subject to the educational exclusion. Taxation of gifts can be quite complicated, and may require consultation with a tax advisor.
