Lifetime Gift Tax Exemption, Explained

The Gift Tax applies to any property you give away to one person that’s worth more than the exemption amount.  For 2013, the exemption amount was $14,000 and it goes up by about $1000 each year.  If you give away more than the Gift Tax Exemption amount, you will dip into your Lifetime Gift Tax Exemption.

What is the Lifetime Gift Tax Exemption?

So let’s say you give $16,000 to your niece.  That’s $2000 over the gift tax exemption amount.  That $2,000 is now considered taxable.  However, that doesn’t mean you pay taxes on it.  Enter the Lifetime Gift Tax Exemption.  You get to dip into that exemption all your life and not pay taxes on the Gift Tax overages you incur.  If you never make it to $5.25 million, you won’t even pay taxes on that “taxable” $2,000 you gave your niece.

The gift tax and the estate tax have the same exemption amount.  They are what the IRS calls “Unified”.  When you die, your estate won’t be taxed if it’s worth less than the exemption amount, which is currently over $5.25 million.  The gift tax “overages” you incurred during your lifetime (like the $2000 mentioned above) count towards that $5.25 million threshold.

 Other Ways to Give But Not Pay Taxes

If you are worried about the $5.25 million and expect to gift or will more than that when you die, there are other ways to give to your loved ones and not have it count towards the lifetime gift tax exemption.  You can contribute to education savings accounts or medical savings accounts.  These have tax-favored status and will allow you to give to anyone you want, tax-free for you and for them