There is a federal gift tax in the United States, and it is unified with the federal estate tax. The maximum rate of the gift tax and the estate tax is 40 percent. Federal transfer taxes can be levied on gifts that you give to your children.
Annual Gift Tax Exclusion
Most people never pay the gift tax because there are exclusions. One gift tax exclusion is the $14,000 per year, per person annual exclusion. Each taxpayer can give up to $14,000 to any number of gift recipients within a calendar year free of the gift tax.
You could utilize this exclusion to give tax-free gifts to your children.
There is an unlimited marital gift and estate tax deduction. You do not have to use an exclusion to transfer assets to your spouse tax-free. Under the tax code, you can transfer unlimited assets to your spouse free of taxation.
Unified Lifetime Gift and Estate Tax Exclusion
In addition to the $14,000 per person annual gift tax exclusion, there is also a unified lifetime gift and estate tax exclusion. The amount of this exclusion is $5.34 million in 2014. The law allows for annual inflation adjustments, so you may see a somewhat larger figure next year.
If you were to give a single person more than $14,000 within a calendar year, you could still give the gift tax-free by using a portion of your unified lifetime gift and estate tax exclusion.
Educational and Medical Gifts
There is an educational gift tax exclusion. You can pay school tuition for students free of the gift tax, but you must pay the institution directly.
This is a tuition only exclusion. You cannot use the educational exclusion to pay for books, fees, and living expenses. However, you could utilize your $14,000 per person gift tax exclusion to assist a student.
You can also pay medical bills for others without incurring any gift tax responsibility.
Tax Efficiency Strategies
If your estate exceeds $5.34 million in total value, you must implement tax efficiency strategies. Utilization of the $14,000 annual gift tax exclusion can be part of the plan.
This is a per person exclusion. If you are married, you and your spouse could give a total of $28,000 to any number of gift recipients each year tax-free. As you give these tax-free gifts, you are reducing the taxable value of your estate.
You can use the $14,000 per person gift tax exclusion to give direct cash gifts, but there are other possibilities. Family limited partnerships can facilitate tax efficient asset transfers. You could use the $14,000 annual exclusion to distribute shares in a family limited partnership.
Irrevocable trusts are also used for tax efficiency purposes. You could potentially use the $14,000 annual gift tax exclusion to incrementally fund an irrevocable trust.