We have had an estate tax in the United States since 1916, and when this tax was first enacted, there was no gift tax. As a result, people who were exposed to the estate tax would give lifetime gifts to avoid the tax.
Tax minded lawmakers were not too pleased with this opening, so a gift tax was enacted in 1924. A repeal of the tax was passed in 1926, so the window of opportunity was open once again for a while, but the gift tax was reenacted in 1932. We have had a gift tax ever since then, and the estate tax and the gift tax were unified under the tax code in 1976.
Gift Tax Exclusions
Every gift that you give is not going to be subject to the gift tax, because there are exclusions that you can use to give a certain amount tax-free. One of these exclusions is the annual per person gift tax exclusion. You can use this exclusion to give as much as $14,000 to any number of people in a calendar year free of the gift tax. There is no limit to the amount that you can give tax-free, as long as you do not give more than $14,000 to any one person.
In addition to the annual gift tax exclusion, there is a unified federal gift and estate tax exclusion. The amount of this exclusion is $5.43 million for the rest of 2015, but it will be going up to $5.45 million next year after an inflation adjustment is applied.
If you wanted to give more than $14,000 to individual gift recipients within a year, you could give the gifts tax-free by using a portion of your unified lifetime exclusion.
To provide an example, let’s say that you gave your son $14,000 on New Year’s Day. You could give this gift tax-free using your annual gift tax exclusion. A month later, you decide to give your son $1 million to start a business. You could use $1 million of your unified lifetime exclusion to give the gift in a tax-free manner. After that, there would be just $4.45 million left to apply to your estate and any future lifetime gifts that you may give.
There is also a medical exclusion that can be used to pay medical bills for others free of taxation, and you can use the educational exclusion to pay school tuition for students without any gift tax consequences. You do have to pay the schools directly, and this exclusion does not extend to living expenses, fees, or books.
Schedule a Free Consultation
If you are ready to take action, our firm would be glad to help. We offer free consultations, and you can send us a message through the following page to set up an appointment: Essex Junction VT Estate Planning Attorneys.