New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 11,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

How Much Can I Give Per Year Without Having to Pay Tax

Administrative note: There will be no articles this upcoming Friday or Monday, due to the holidays. The regular posting schedule will resume the following Friday (1/2). I hope you all enjoy your holidays!

A reader writes in, asking:

“How much can I give per year without having to pay any tax? I read in one place that it’s $14,000 and in another place that it’s over $5 million.”

First, a quick point of clarification for any readers new to the topic: The recipient of a gift does not have to pay tax on it. It is only the person giving the gift who has to worry about the gift tax.

Excluded Gifts

None of the following types of transfers are subject to the gift tax:

  • Gifts to your spouse,
  • Gifts to a qualifying charity,
  • Gifts to a political organization for its use, and
  • Payments made directly to an educational institution or health care provider to pay for somebody else’s tuition or medical expenses.

In other words, you can give away as much money as you want in any of the above ways, without having to worry about gift tax.

Annual Gift Tax Exclusion

For gifts that don’t fall under any of the above exclusions, you can still give (for 2014 and 2015) up to $14,000 per year without the gift being taxable.

A key point here is that this annual exclusion is per donor, per recipient. In other words, you can give up to $14,000 per year to as many different people as you’d like, without ever exceeding the annual exclusion. And if you’re married, your spouse could also give up to $14,000 to each of those same people without ever exceeding the annual exclusion.*

Lifetime Exclusion

So what happens once you exceed the annual exclusion amount? You’ll have to file Form 709 to report the taxable gift, but in most cases you still won’t have to pay any gift tax. That’s because, after exhausting your annual exclusion, you then have to exhaust your lifetime exclusion before you actually have to pay any gift tax.

For example, if you give $40,000 to your brother in 2015, you will have made a taxable gift of $26,000 (that is, $40,000 minus the $14,000 annual exclusion). This $26,000 amount will come out of your lifetime exclusion.

As of 2014, the lifetime exclusion is $5.34 million (and twice that for married couples). For 2015, the amount is $5.43 million (and twice that for married couples). As you might imagine, most people never have to pay any gift tax, because they never even come close to exceeding their lifetime exclusion.

Of note: The lifetime exclusion is a shared exclusion with the estate tax. (The overall purpose of the gift tax, by the way, is to eliminate the possibility of people simply gifting their assets to their heirs before they die, in order to avoid the estate tax. So a shared exclusion makes sense.) In other words, by making a taxable gift, you reduce the amount that can be left to your heirs before the estate tax kicks in.

*Spouses are also allowed to elect (on Form 706) to have gifts treated as if they were given 50/50 by each spouse. This would be helpful, if, for instance, you have a $20,000 piece of property that you want to give to somebody. If only one spouse gives it (and no special election is made), then there’s a $6,000 taxable gift (assuming a $14,000 annual exclusion). But if a gift-splitting election is made, there would be no taxable gift because a total $28,000 annual exclusion would be available.

For More Information, See My Related Book:

Book6FrontCoverTiltedBlue

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions, exemptions, and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

Speak Your Mind

*

Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2014 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy