Question

Ignoring the annual exclusion amount, in which, if any, of the following independent situations has Jean made a taxable gift?

a.         Jean gives her 29-year old nephew $20,000 by contributing it to an IRC § 529 plan for him. The nephew does not qualify as Jean’s dependent.

b.         Jean buys her husband a new $120,000 RV for his birthday.

c.         Jean sends $24,000 to Temple University to cover her nephew’s tuition. The nephew does not qualify as Jean’s dependent.

d.         Jean contributes $10,000 to her U.S. Senator’s reelection campaign.

e.         Jean places $50,000 in a revocable trust in which she retains a life estate, with the remainder going to her best friend from high school.

Answer 1

If you make a gift that exceeds the annual gift exclusion of $14,000 in 2016 or 2017, it may be subject to the gift tax. However, there is a lifetime exemption amount of $5.45 million in 2016 and $5.49 million in 2017 that must be exceeded before gifted cash or property is subject to tax.

What is the gift tax in the United States?

In the United States, certain gifts are subject to tax, including cash gifts as well as property. If a gift is taxable, it may be subject to gift tax rates of up to 40%.

However, the vast majority of Americans never have to pay the gift tax, even if they give a substantial sum of money, or valuable property, to other people because of two important rules.

The annual exclusion

As of 2017, the IRS allows a $14,000 annual exclusion amount when it comes to taxable gifts. In other words, if a gift of money or property is valued at $14,000 or less, it does not need to be reported to the IRS and no gift tax will need to be paid.

This exemption is per person, and is doubled for married couples to $28,000, which can make it quite useful in estate planning. To illustrate this point, let's say that you're married and have three children, all of whom are also married. You can give away up to $28,000 to each of those six people, tax-free, for a total of $168,000 per year that the IRS can't touch. This is a common strategy for reducing the taxable value of an estate.

The lifetime exemption

Speaking of the taxable value of an estate, it's important to mention that the gift tax and the estate tax systems in the United States are connected. Estate taxes are only assessed on estates valued at $5.45 million or more for the 2016 tax year, and $5.49 million or more for the 2017 tax year. These amounts are known as the lifetime exemption.

The lifetime exemption amount applies to gifts as well. After you reach the $14,000 annual exclusion, the excess reduces your lifetime exemption. There's no way of knowing what the lifetime exemption will be in the year you die, so the IRS keeps a running total of your taxable gifts each year (more on that later).

For example, we hope it's not the case, but for simplicity's sake let's say that you die in 2017. Over the years, you've given a total of $1 million in taxable gifts to family and friends. Therefore, the amount of your estate that is exempt from taxation is reduced from $5.49 million to $4.49 million.

Other exempt gifts

In addition to these non-taxable amounts, there are a few more exceptions to the gift tax. Here are four that are excluded from both the $14,000 annual exclusion amount and the lifetime exemption.

• Charitable gifts
• Gifts to a spouse who is a U.S. citizen (gifts to foreign spouses are subject to an annual $148,000 limit as of 2016)
• Educational gifts, although this applies to payments made directly to a qualified educational institution only, not to things like books and school supplies
• Medical expenses paid directly to the person providing the care

Gifts to a spouse who is a U.S. citizen (gifts to foreign spouses are subject to an annual $148,000 limit as of 2016)

As per above situation the following independent situations has Jean made a taxable gift

b.         Jean buys her husband a new $120,000 RV for his birthday.