The federal gift tax applies to all gifts that you make during the course of your lifetime. However, every U.S. citizen is given a lifetime exemption from paying gift taxes. Thus, a gift tax will only be owed if the total value of all of the gifts that you've made exceeds your lifetime exemption from gift taxes.
What Happens Once the Lifetime Gift Tax Exemption is Used Up?
In 2014 gifts valued at $14,000 or less to any one person other than your spouse, or $145,000 in 2014 for gifts made to a spouse who is not a U.S. citizen, are exempt from federal gift taxes due to the annual exclusion from gift taxes. However, while annual gifts that exceed $14,000, or $145,000 for gifts made to a non citizen spouse, are considered taxable gifts and must be reported to the IRS on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, usually the person making the gift will not have to pay any gift tax. Why not? Because, as mentioned above, everyone is given a lifetime gift tax exemption that can be used to offset their taxable gifts. In 2010 the lifetime gift tax exemption was $1,000,000, in 2011 the lifetime exemption increased to $5,000,000, in 2012 the lifetime exemption was $5,120,000, in 2013 the lifetime exemption was $5,250,000, and in 2014 the lifetime exemption has increased to $5,340,000. The top gift tax rate in 2010, 2011 and 2012 was 35%, and in 2013 and future years it has increased to 40%.
Some Gift Tax ExamplesOnce the total value of annual gifts made to a nonspouse family member or friend reaches $14,000 in 2014, or $145,000 for gifts made to a noncitizen spouse in 2014, any additional gifts made in the same year to the same person will become taxable for federal gift tax purposes. For example, in 2014 if a father makes a one time gift of $114,000 to his son for the purchase of a home, then $14,000 of the gift is free and clear of the federal gift tax and the remaining $100,000 is a taxable gift. Or, if the father gifts his son $14,000 in January 2014 and then an additional $100,000 in June 2014, then the first $14,000 is free and clear of the federal gift tax and $100,000 is a taxable gift.
Using the example above of the gift of $114,000 to the son, while the first $14,000 is free and clear of any federal gift tax due to the annual exclusion from gift taxes, the next $100,000 is a taxable gift made by the father to the son. But instead of paying a gift tax the father will reduce his lifetime gift tax exemption by $100,000. Thus, in 2014 the father will be able to give away another $5,240,000 before any federal gift tax will be due:
- $5,340,000 lifetime gift tax exemption in 2014 - $100,000 taxable gift = $5,240,000 lifetime gift tax exemption remaining
Once the entire $5,340,000 lifetime gift tax exemption is used up, a federal gift tax will be owed. As mentioned above, the top current gift tax rate is 40%.
How to Report a Taxable Gift to the IRS
If you make a taxable gift in any given year, then you are responsible for reporting it to the IRS on Form 709 - United States Gift (and Generation-Skipping Transfer) Tax Return. The return is due on the same date as your income tax return for the year in which the gift is made - in other words, April 15 of the following year.