You will never have to pay taxes for gifts that are at or below the annual exclusion limit. You'll want to review your gift and estate strategy each year to make sure your plans remain relevant based on your financial situation or changes in tax laws. Form 4506-T has multiple uses and special attention should be paid when completing the form for a gift tax inquiry. These donations will not count toward your estate and lifetime gift tax exclusion, and the recipient will not owe any federal gift or gift tax.
If you are making a donation to more than one person, the exclusion amount will be applied to each person individually. The main restriction on the use of the annual exclusion is that only “current interest” donations qualify for the exclusion. Most estate planners expect that the lifetime exemption that applies in a year when a donation is made will determine whether it is tax-free or not. However, there are specific gift strategies you can use today that can reduce the size of your taxable estate and leave your donations and your wealth tax exemption intact.
Making a gift or leaving your estate to your heirs usually doesn't affect your federal income tax. Any lifetime donations that exceed the annual exclusion and do not qualify as tax-free medical and educational gifts are deducted from your lifetime exemption. But you may still want to file one for cover in case the IRS later claims that the property was undervalued and that the transaction was actually a partial donation. In general, cash and assets with poor appreciation are better for gifts, while highly prized assets are better to transfer as part of your estate.
Although no tax is due in this situation, the first spouse must file a gift tax return stating that the second spouse has agreed to split the gift. There are some in Congress and the IRS who want to “recover taxes on gifts made with the highest exemption amount if the exemption is lower when the estate is processed. In addition to the annual gift tax exclusion, donors must be aware of the basic exclusion amount. As with any tax planning strategy, there is always the possibility that Congress could change laws related to exemption from gift and inheritance taxes.
Basically, this means that any gift with conditions or limits does not qualify for the annual tax-free exclusion.
