IRS Increases Annual Gifting Exclusion for 2013

The Internal Revenue Service recently published various inflation based adjustments.  Among the two dozen tax provisions affected was the Annual Gift Exclusion amount.  The amount you can gift to someone has increased from $13,000 in 2012 to $14,000 in 2014.

What is the Annual Gift Exclusion Amount?

In the United States a person with interests/assets over $14,000 can not just gift their entire interests to another person without running into Federal Gift Taxes and his or her ultimate Estate Taxes as well (As you will see below it doesn’t mean you’ll actually owe anything).  To prevent this post from being 5,000 words we are going to just focus on yearly gifts between citizens which are controlled by your Annual Gift Exclusion.  The annual exclusion amount is the amount of a present interest that one Donor may gift to another Donee, who is not his or her spouse.

The IRS has a great primer on the Estate and Gift Tax in Publication 950, which expands on what is an “interest”

The gift tax applies to transfers by gift of property. You make a gift if you give property (including money), the use of property, or the right to receive income from property without expecting to receive something of at least equal value in return. If you sell something for less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift

Not All Gifts are Taxable

Publication 950 provides a pretty succinct explanation of what gifts fall outside of a “taxable gift”

The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.

    1. Gifts that are not more than the annual exclusion for the calendar year.
    2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
    3. Gifts to your spouse.
    4. Gifts to a political organization for its use.

In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.

The reason that gifts to your spouse are not taxable is that there is an unlimited marital deduction for gifts between spouses.  Interestingly, it wasn’t until 1981 that an unlimited marital deduction was implemented.

What Happens If I Gift More than My Annual Exclusion?

First you have to determine if the gift is eligible for split gifting:

If you or your spouse makes a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must agree to split the gift. If you do, you each can take the annual exclusion for your part of the gift.

Currently, gift splitting allows married couples to give up to $26,000 [Evan’s note – this number is now $28,000] to a person without making a taxable gift.

If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion

Second, if you have gifted more than that amount the donor starts to eat into his Unified Credit Amount which, for all intents and purposes, is the amount that one is allowed to pass at death.  Currently, in 2012 that amount is $5,120,000 but is set to reset unless something is done in the next 33 days or so to $1,000,000.  If you have used your entire unified credit amount then it will be taxed to the donor at 35% in 2012 and 55% in 2013.

Most people do not encounter gifting issues but they are good to know they at least exist.

5 Responses to IRS Increases Annual Gifting Exclusion for 2013

  1. what if a non US citizen relative oversees gifts money to their children who live in the USA and are US citizens? what is the annual limit and how is taxation handled? what are the implications to the parent (the non US citizen gift giver) and what are the implications to the recipient (the US citizen child)?

    • I run mostly into people with the reverse situation, but I am almost positive that unless we have a estate/gift tax treaty with the Country Money coming in from gifts from donee-individuals are not taxed at the gift level. They do however have to be declared on a Form 3520 if over $100K I believe. Check out:

      http://www.irs.gov/pub/irs-pdf/f3520.pdf

      • so if i understand correct, if there is no treaty, amounts received under 100k from non US citizens overseas have no tax implications to the US citizen recipient living in the USA?

        now curious about the reverse situation that you mentioned. what happens in that case?

  2. you mentioned that you run mostly into people with the reverse situation, so I was asking what the tax treatment is in that case.

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