Back in 1916, the federal estate tax was established. If you knew that your estate was going to be subject to this tax after you pass away, what would you do? Clearly, you would give gifts to your loved ones before you pass away so that you could avoid the death tax.
People did take this route at first, but in 1924, a gift tax was enacted to close the door on tax-free lifetime gift giving. It was repealed a couple of years later, but it was reenacted for good in 1932. The federal gift tax is unified with the estate tax.
There is an unlimited marital transfer tax deduction. You can transfer any amount of property to your spouse tax-free, while you are living, or after you pass away, as long as you and your spouse are American citizens.
Annual Gift Tax Exclusion
You do not have to pay taxes on every gift that you give, because there are exclusions. One of them is the annual gift tax exclusion. At the time of this writing in 2015, this exclusion stands at $14,000 per person, so you can give up to $14,000 per person to an unlimited number of gift recipients free of the gift tax.
This exclusion has been increased periodically, but there will be no increase in 2016. The $14,000 per person figure will remain in place in 2016.
Unified Lifetime Exclusion
In addition to this $14,000 per person, per year gift tax exclusion, there is also a unified lifetime gift and estate tax exclusion. You could use a portion of this exclusion to give tax-free gifts that exceed $14,000 per person. However, if you do this, you would be reducing the exclusion that would be left to apply to your estate.
For the rest of 2015, the unified lifetime gift and estate tax exclusion stands at $5.43 million. Though there will be no increase to the annual gift tax exclusion, there is going to be an inflation adjustment applied to the unified exclusion in 2016. Next year, the exclusion will go up by $20,000 to $5.45 million.
Additional Gift Tax Exclusions
There are two additional gift tax exclusions that we should touch upon here. One of them is the medical exclusion. You can pay health care bills for others free of the gift tax, and you can also purchase health insurance for the benefit of other people without incurring any gift tax responsibility.
You could use the educational exclusion if you want to pay school tuition for students, but the exclusion does not apply to books, fees, and living expenses.
Schedule a Consultation
Our firm can help if you have questions about taxation or any other estate planning concern. We offer no obligation case evaluations, and you can send us a message through the following link to set up an appointment: Grand Forks ND Estate Planning Attorneys.