Many clients will state that they know they can make gifts of up to $10,000 per year and they “don’t count”. However, they don’t really understand what they “don’t count” against.
This has to do with the Federal Estate and Gift Tax. We each now have an exempt amount of (adjusted for inflation in 2013) of $5.25 Million. What that means is that over our lifetime, we are able to pass along through gifts or bequests at our death, the sum of $5.25 Million before our estate must pay Estate Tax.
During our lifetime, when we make gifts, the amounts must be applied against this exempt amount. They way that this is done is by filing a Gift Tax Return for the year of the gift. If the amount of the gifts is under $5.25 Million then no tax is due; however, it uses up our lifetime exemption.
So, what about the $10,000 gift that “doesn’t count”? First, this amount has been adjusted for inflation so that it is now $14,000. Next, it doesn’t count against the $5.25 Million if the gift is limited to $14,000. If you are married, spouses can combine their gift so that they can give $28,000 to an individual.
Who can you make this gift to? Anyone
How many people can you make such a gift to? As many as you want.
For example this year, relying on the annual exclusion, a married couple with a child who is married and has two children could make a joint cash gift of $28,000 to the adult child, the child’s spouse and each grandchild – four people – providing the family with $112,000 a year. Only gifts that exceed the limit count against the lifetime exclusion.