Understanding the Gift Tax Exclusion


Most of us will never face taxes related to money or assets we give away.


June 2013


“How can I avoid the federal gift tax?” If this question is on your mind, you aren’t alone. The good news is that few taxpayers or estates will ever have to pay it.



Misconceptions surround this tax. The IRS sets annual and lifetime gift tax exclusion amounts, and this is where the confusion develops.



Here’s what you have to remember: practically speaking, the federal gift tax is a tax on estates. If it wasn’t in place, the rich could simply give away the bulk of their money or property while living to spare their heirs from inheritance taxes.



Now that you know the reason the federal government established the gift tax, you can see that the lifetime gift tax exclusion matters more than the annual one.



“What percentage of my gifts will be taxed this year?” Many people wrongly assume that if they give a gift exceeding the annual gift tax exclusion, their tax bill will go up next year as a result. Unless the gift is huge, that won’t likely occur.



The IRS has set the annual gift tax exclusion at $14,000 this year. What this means is that you can gift up to $14,000 each to as many individuals as you like in 2013 without having to pay any gift taxes. A married couple may gift up to $28,000 each to an unlimited number of individuals tax-free this year. The gifts may be made in cash, or they can be made in stock, contributions to 529 plans, collectibles, real estate – just about any form of property with value, as long as you cede ownership and control of it.1,2,3



So how are amounts over the $14,000 annual exclusion handled? The excess amounts count against the $5.25 million lifetime gift tax exclusion. While you have to file a gift tax return if you make a gift larger than $14,000 in 2013, you owe no gift tax until your total gifts exceed the lifetime exclusion.2,3



“Are gifts subject to income tax?” It is important to remember that cash gifts (or checks) are not subject to income tax. The donor does NOT get a tax deduction, and the donee does NOT have to include the gift as income.



“What happens if I go over the lifetime exclusion?” If that occurs, then you will pay a 40% gift tax on gifts above the $5.25 million lifetime exclusion amount. One exception, though: all gifts that you make to your spouse are tax-free provided he or she is a U.S. citizen. This is known as the marital deduction.1,2,3



“But aren’t the gift tax and the estate tax unified?” They are. The gift tax exclusion and the estate tax exclusion are sometimes called the unified credit. So if you have already made taxable lifetime gifts that have used up $3 million of the current $5.25 million unified credit, then only $2.25 million of your estate will be exempt from inheritance taxes if you die in 2013.3



However, the $5.25 million unified credit given to each of us is portable. That means that if you don’t use all of it up during your lifetime, the unused portion of the credit can pass to your spouse at your death. So if you only use up $1.25 million of your unified credit during your lifetime and your spouse has the full $5.25 million credit remaining, your spouse would have the chance to transfer as much as $9.25 million tax-free, either through gifts made during your life or after your death.3



In sum, most estates can make larger gifts during life without any estate, gift or income tax consequences. If you have gift tax, income tax or estate tax questions, please give us a call.





Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA




Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.





1 - www.chron.com/news/article/New-act-clears-up-estate-gift-tax-confusion-4301217.php [2/22/13]

2 - www.nolo.com/legal-encyclopedia/changes-gift-tax-laws-coming.html [1/13]

3 - www.forbes.com/sites/deborahljacobs/2013/01/02/after-the-fiscal-cliff-deal-estate-and-gift-tax-explained/ [1/11/13]



This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.



7 Lessons from the Fourth of July
How & When to Sign Up for Medicare

Archived Newsletters

Investment Updates

Newsletters Sign Up

Account Login

Contact Info

Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
Doylestown, PA 18902
Phone: 215-340-5777
Fax: 215-340-5788
Email: Info@KohlheppAdvisors.com

Securities offered through Cambridge Investment Research, Inc. a Registered Broker/Dealer, Member FINRA/SIPC. Investment Advisory Services offered through Kohlhepp Investment Advisors, Ltd., a Registered Investment Advisor. Kohlhepp Investment Advisors, Ltd. and Cambridge Investment Research Advisors, Inc. are not affiliated.

Due to various state regulations and registration requirements concerning the dissemination of information regarding investment products and services, we are currently required to limit access of the following pages to individuals residing in states where we are currently registered. We are licensed in the following states: AZ, CA, CO, DE, FL, GA, IN, KY, LA, MA, MD, NC, NJ, NY, OR, PA, RI, SC, TX, VA, VT, WA

Check the background of this firm on FINRA's BrokerCheck