The Annual Gift Tax Exclusion
A sweet elderly woman recently retained me to assist her in transferring the deed to her mortgage free home to her two daughters. In doing so, I thought others might be interested in how the annual gift tax exclusion applies.
The annual gift tax exclusion does not relate to “ordinary income” – wages and profits from a business. Rather, it relates to estate taxes – the amount paid to the government upon the death of an individual with significant assets.
When a person dies they are charged federal estate taxes upon assets that transfer to anyone other than their spouse in excess of a certain limit -- $3,500,000 for 2009. In an effort to keep people from giving all their assets away before they die, the IRS placed a limit on the amount a person may gift to another person in any one year and during their lifetime. In 2009, the annual gift limit is $13,000 per recipient per year and the lifetime limit is $1,000,000. Anything a person gives as a gift counts against their lifetime limit of $1,000,000 and anything given in excess of $13,000 reduces their $3,500,000 federal estate tax exemption.
For example, if I give my son a gift of $20,000 in 2009, my lifetime gift limit would be reduced to $980,000 and my estate tax exemption when I die would be reduced by $7000 to $3,493,000. In this example I will have to file a gift tax return because I gave in excess of the annual limit. Had I only gifted my son $13,000, a gift tax return would not be necessary.
My client’s daughters were extremely grateful for the gift they received and felt comfortable knowing that before their mother made the gift, she consulted both her attorney and tax advisor.
