The act of giving is indeed a wonderful thing. It evokes gratitude, and ultimately makes us healthier and happier. However, there is a federal gift tax of 40 percent imposed on certain gifts. It is important that you understand these tax laws to eliminate or reduce your tax liability.
In 2016, you can give up to $14,000 ($28,000 for a married couple) in cash, stocks, property, etc. to as many people as you wish without any gift tax liability. The gift tax is based on the value of the transferred property on the date the gift is complete. Certain gifts are not subject to the annual limit, including gifts to your spouse (as long as he or she is a U.S. citizen), donations to charitable organizations, transfers to political organizations and payments of tuition or medical expenses on behalf of another person that are paid directly to the educational or medical institution.
This does not necessarily mean a gift over the annual limit will be taxable. In fact, most American taxpayers will never have to pay gift taxes because there is a high lifetime exemption that applies to federal gift and estate taxes combined. This exemption (adjusted annually for inflation) is $5,450,000 in 2016. The amount of gifts over the annual limit can be applied cumulatively against this lifetime exemption.
Any amount applied toward your lifetime exemption reduces the exemption available for estate taxes. After the lifetime exemption is surpassed, any taxable gifts and your estate are subject to the federal gift and estate tax.
For gifts above the annual limit, you must file a federal gift tax return in order to apply the lifetime exemption to the gift. You may also have to file a return for certain types of gifts below the annual exclusion (e.g. ownership interests in closely held businesses). Please consult us if you have any questions.