Annual Gift Tax Exclusion

The government levies taxes on gifts if the amount exceeds a certain limit in a year. The limit up to which the gifts are non-taxable is known as annual gift tax exclusion. Before we go ahead and discuss annual gift tax exclusion, it is important to understand what is a gift tax and how it works. Many people in US give away gifts to their friends and relatives every year and mistakenly expect that the government would give them tax deductions as they are displaying exemplary generosity in these cash stricken times! That, unfortunately, is not the case and to tell you the fact, it works the other way round! That is if you give away too many gifts, the government might also ask for its share.

Anytime you gift property, money, art, jewelry, etc., without expecting something of equal value in return, you are liable to be taxed by the government. So, if you sold your country house to one of your old pals and charged him lesser than the fair market value of the property, it would be considered as a gift. According to the Internal Revenue Service (IRS), every time you give away gifts whose combined value is over thirteen thousand dollars, you are to report and pay the tax on your own before Uncle Sam finds out! It can be done by filling the Form 709: United States Gift Tax Return. You can get all information regarding this from IRS official website.

The annual gift tax exclusion amount for 2011 has remained unchanged and it is same as that of previous year. Let us take a look.

• You can legally gift someone up to $13,000, if you file as a single. This applies to each gift that you give away, that is, if you have five friends, you can gift each of them up to 13,000 every year without being taxed.
• In case of a husband and a wife, you can combine the gift amount, that is you as a couple can give away gifts up to $26, 000 to each individual.

Lifetime Gift Tax Exclusion

Many people confuse the annual gift tax exclusion for lifetime gift tax exclusion. Lifetime gift tax exclusion is the amount up to which the gifts that exceed the annual limit remain non-taxable over a person's lifetime. The lifetime gift tax exclusion was revised from $1 million to $5 million this year. According to the IRS, one can give away gifts up to $5 million that exceed the annual gift tax limit over your lifetime without getting taxed. Let us illustrate it with the help of an example.

Suppose you gifted $20,000 to ten of your friends in 2010. As mentioned before, the annual gift tax exclusion is $13, 000, which means you have gifted $7000 extra to each of your friends. If we calculate, for ten friends the amount would be $700010 = $70,000. So, you will end up spending $70,000 of your $5 million lifetime gift tax exemption.

Exceptions to the Annual Gift Tax

Some of the exceptions to the annual exclusion are:

• Tuition expenses: Tuition expenses strictly mean that the money is to be gifted to pay the tuition fees and does not include the living expenses, expenses on books, food, etc. If you want to be exempted from the gift tax you have to make sure that you are making the payment directly to the concerned institution and not to the individual.
• Medical expenses: Like tuition expenses, the medical expenses have to be paid to the medical institution or the hospital where the individual is being treated. Make sure that you are not reimbursing the money through insurance as it will make the gift eligible to be taxed.
• Gift to spouse and political organizations: The gift will remain non-taxable if you have given it to your spouse and other political organizations.

Many people use gift tax exclusion strategically to plan out their taxes. We hope that this article will be helpful in clearing all the doubts about gift tax and gift tax exemptions.