Preserve Your Legacy

Estate Planning | Elder Law | Special Needs Planning



When you hear about the gift tax you may wonder about the details. Are gifts that you give to your children taxable?

Let’s examine the answer to this question.

Gift Tax Parameters

You cannot discuss the gift tax without discussing the estate tax, because the gift tax is unified with the estate tax. In fact, the gift tax would not exist if it was not for the estate tax, because it is in place to close a loophole.

If there was no gift tax, you could give gifts to your loved ones while you are still living to avoid the death tax. This is why there is a gift tax in place.

There is a unified gift and estate tax credit or exclusion. You can transfer assets up to this amount, while you are living or after you pass away, free of taxation. The amount of this exclusion in 2014 is $5.34 million.

The maximum rate of the gift and estate tax is 40 percent.

To explain what this means to you in direct terms, you could give tax-free gifts during your life to your children, or to anyone else, totaling $5.34 million. Anything that you were to give above and beyond this amount would potentially be taxable.

(There is a caveat to the above statement. Gifts to your spouse are totally exempt from transfer taxes.)

Annual Gift Tax Exclusion

You should be aware of the fact that there is an annual gift tax exclusion that exists apart from the unified lifetime exclusion. It is possible to give as much as $14,000 annually to each of your children, or to any other gift recipient, free of the gift tax.

If you give $14,000 or less per person, you would not be using any of your unified lifetime exclusion to give the gifts tax-free.

This exclusion is very useful for those who are exposed to the estate tax. You can give these limited gifts to people who would otherwise be inheriting money from you someday tax-free.

If you use the annual exclusion over a number of years, you can transfer a significant sum free of taxation. As you are doing this, the overall value of your estate is being decreased, and your estate tax exposure is being decreased along with it.

Other Tax-Free Gifts

In closing we would like to touch upon two additional exemptions. You could pay the school tuition for others free of taxation. These educational gifts can be given to any number of people, and there is no limit to the total amount you can give.

You do have to give the gifts directly to the institutions to pay for tuition only, not books or fees.

It is also possible to pay for the medical expenses of others tax-free. This gift tax exemption extends to the purchase of health insurance for the benefit of others.