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Top Five Gifts Without Tax

by Lucia Hagy, CPA - Senior Staff Accountant

To Our Clients and Friends

As the nights get a little cooler and the leaves start showing their brilliant colors we approach the season of giving. It may be time to consider making lifetime gifts to loved ones. Let's look at ways to make gifts that comply with the numerous gift tax rules and yet allow the recipient to get the maximum benefit of your generosity.

What are gift taxes? The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The donor is responsible for paying the gift tax.

How can I avoid the gift tax? You can avoid the gift tax by staying within the annual exclusion limit or by making a type of gift that qualifies as a non-taxable gift.

Annual exclusions available

For the tax year 2012, the annual exclusion amount is $13,000 and this amount is expected to remain the same for 2013. An individual may make a $13,000 gift to each donee. In other words, you can give each of your loved ones a gift of up to $13,000 per calendar year without paying gift taxes. If you are married, you and your spouse are each entitled to the annual exclusion amounts. For example, a married couple with three children may make the following gifts:

  • Husband :  child 1=$13,000, child 2=$13,000, child 3=$13,000
  • Wife :         child 1=$13,000, child 2=$13,000, child 3=$13,000

In this example the total annual non-taxable gifts the couple will make equals $78,000.

Gifts that qualify as non-taxable

The following gifts are not taxable gifts and can be made in addition to the annual exclusion amount gifted:

Education Exclusion. Payments made for tuition that are directly payable to the educational institution and are not payable to the individual receiving the education or to their parents qualify as a non-taxable gift. The payments must be for tuition only. Books, supplies, room and board, or other similar expenses do not qualify for the exclusion. Direct payments to educational institutions are not limited and can be made in addition to the $13,000 annual exclusion amount.

Medical Exclusion. Like tuition, medical payments that are directly payable to the medical care provider and not to the individual qualify as a non-taxable gift. The medical care must meet the requirements for the definition of medical care for income tax deduction purposes. Medical care also includes amounts paid for medical insurance on behalf of an individual. Your medical exclusion does not apply to amounts paid for medical care that are reimbursed by the donee's insurance. Direct payments to medical care providers are not limited and can be made in addition to the $13,000 annual exclusion amount.

Gifts to your spouse. Gifts to your spouse are not considered as taxable gifts.

Gifts to a political organization for its use are not considered as taxable gifts.

Other considerations:

For your gift to qualify for the annual $13,000 exclusion, the gift must be a gift of present interest in the property. In other words, the donee must have full rights to the use of the property at the time the gift is made. A gift of future interests, regardless of the amount, is subject to gift tax.

This article only touches on the basics of the gift tax rules and non-taxable gifts. The laws on Estate and Gift taxes are some of the most complicated areas of taxation. Please come see us with any of your Estate planning questions or concerns. Having a plan will put your mind at ease and allow you to fully enjoy the season of giving and those brilliant fall colors.

Very truly yours,

Lucia Hagy, CPA, Senior Staff Accountant