Limits on Tax Free Gifts
- Gifts of money made during your life may be liable to federal gift tax.dollars image by peter Hires Images from Fotolia.com
If you make a gift of property or money to anybody during your life, the gift may be liable to federal gift tax. However most gifts will not be subject to the gift tax. As long as the gifts fall within certain limits or meet certain guidelines, they will be tax free to you. The person who receives the gift will usually not have to pay any gift tax. - Unified credit is an amount of money that reduces or eliminates the gift tax. Any applicable gift tax in a year is subtracted from the unified credit and the remainder is carried over to other years. The unified credit for gift tax purposes is $345,800, as of tax year 2009. Therefore, over a lifetime you can make gifts up to this value without paying gift tax. You must still file a form 709 gift tax return if you subtract from your unified credit, even if you end up paying no gift tax.
- Exceptions to gifts for which tax is applicable are gifts made to your spouse, political organizations or charities, or tuition or medical expenses paid directly to the relevant institution. Beyond this, however, there is an annual exclusion for gift tax per calendar year that applies to each different person to whom you make a gift. The annual exclusion is $13,000 as of tax year 2009, and therefore you may give up to $13,000 to as many different people as you want tax free each year. Also, if you or your spouse makes a gift to someone, it can be considered as a gift from the both of you, and therefore an annual exclusion of $26,000 applies. If you make a gift over the value of the annual exclusion, $13,000 is tax free but the remainder could also become tax free via unified credit.
- There may be further limits on tax free gifts if they are subject to the Generation-Skipping Transfer Tax. The GST is applicable to gifts paid to somebody who is two or more generations removed from your own, for example, grandchildren. Each person has an exemption from GST equivalent to the annual exclusion for gift tax, $13,000, but it applies on a gift-by-gift basis. Everybody also has a lifetime exclusion of $3,500,000 for GST.
