What is the annual gift tax exclusion?

The transfer tax system, all lifetime gifts and bequests made at the time of death that exceed certain dollar thresholds are subject to gift and inheritance tax rates of up to 40%. Go above and you'll need to fill out a gift tax form when you file returns, but you could still avoid having to pay any gift taxes. Inheritance taxes should not be increased if the lifetime exemption is lower when processing the inheritance than when you made the donations. Instructions on how to use the Electronic Federal Tax System (EFTPS) are found in Publication 4990PDF (do not use Publication 4990 for same-day bank transfer payment method).

Because of the increased likelihood that the lifetime exemption will be reduced, estate planners are encouraging many people to consider reducing the value of their properties by making tax-free donations of assets while they are able to do so to the extent that the assets are not needed to ensure retirement security. Caring is sharing, but some situations often inadvertently trigger the need to file a gift tax return, professionals say. Form 4506, Request for Copy of Tax Return PDF, is used to request a copy of previously filed tax returns with all attachments. As with the annual exclusion for everyone else, you can give your non-citizen spouse this amount per year without incurring a gift tax.

This exemption is sometimes called a consolidated credit because it shares its limit with wealth tax. If you exceed those limits, you will have to pay a tax on the number of gifts that exceed the limit. Finally, individuals who make donations as part of their overall estate and financial plan often enlist the services of lawyers and CPAs, EAs and other professionals. Payments for any item that qualifies as deductible itemized medical expenses on an individual income tax return qualify for tax-free medical gifts.

The IRS will reduce your remaining lifetime exclusion over time and then use that amount to determine the amount of your estate on which you must pay wealth tax. If you're lucky and generous enough to exhaust your exclusions, you may have to pay gift tax. They're not gifts and don't count toward the exclusion amount if you pay education or doctor bills on someone's behalf.