The gift tax annual exclusion and lifetime exemption

How it works

A giver can hand up to this year's official gift tax annual exclusion (not yet verified here; see the official source below) to each recipient in a year with no form and no tax, and a married couple can give twice that to each person by splitting gifts. Tuition paid directly to a school and medical bills paid directly to a provider do not count against the exclusion at all. A gift above the yearly amount to one person requires a gift tax return, and the excess is subtracted from the giver's lifetime exemption of this year's official estate and gift lifetime exemption (not yet verified here; see the official source below), which is shared with the estate tax at death. No tax is actually paid until the lifetime total is used up, which very few people reach. The recipient owes no income tax on a gift and takes over the giver's cost basis in property received. Gifts between spouses who are citizens are unlimited.

What it gives

The yearly exclusion resets every January and applies per recipient, so a family can move a large sum over time with no tax.

Direct payment of tuition or medical bills is unlimited and does not use the exclusion.

The recipient reports nothing and owes nothing on a gift.

What it costs, or where the catch is

A gift of appreciated stock carries the giver's low basis, so the recipient pays the capital gain when sold, while inherited stock would have gotten a stepped up basis.

A gift above the yearly amount requires a gift tax return even when no tax is due.

Large gifts within five years can affect Medicaid eligibility under state rules that have nothing to do with the tax law.

A worked example

Dev and his wife give their daughter and her husband money toward a house. Each of the two parents gives each of the two recipients an amount up to the yearly exclusion. If the exclusion were $18,000, that is four gifts of $18,000, a total of $72,000, with no form required. Dev also pays $14,000 of his grandson's tuition straight to the college, which does not count at all. Had the parents given $100,000 in one year, the extra $28,000 would reduce their lifetime exemption.

Where it goes wrong

The common miss is writing one large check to a child and assuming gift tax is owed, when the only consequence is a return that reduces a lifetime exemption most people never exhaust.

Who confirms it for you

For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS: Frequently asked questions on gift taxes. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.