Article written by:
Greg Heimkreiter, CPA
As the holiday season approaches, many individuals make gifts not only to their favorite charities but also to their family members and friends. As these holiday gifts are made, there are gift tax rules to consider. A gift is generally a transfer to an individual where full consideration is not received in return. Generally any gift is subject to the gift tax, but there are exclusions available.
The first exclusion is the annual gift tax exclusion. For 2017, the gift tax exclusion is $14,000. This means that a donor can give up to $14,000 to an individual without being required to file a gift tax return. If a gift to an individual exceeds the $14,000 threshold, then the donor would generally need to file a gift tax return and potentially pay tax on the amount of the gift over $14,000. If the donor is married and a gift exceeds $14,000, then the spouses can elect to split gifts by filing gift tax returns. The annual exclusion can be up to $28,000 for a gift to one individual from a married couple who elect to split the gift.
There are other exclusions in which an individual can gift money in excess of $14,000 in 2017 without being subject to gift tax. One such exclusion is that a spouse can gift an unlimited amount to their spouse who is a U.S. citizen. If the recipient spouse is not a U.S. Citizen, then the donor can exclude gifts of $149,000 or less in 2017. In order for the gift to qualify as an excluded gift to a spouse, the gift cannot be a terminable interest. In other words, if the gift is one that ends at death or at another specified date then it would not qualify.
Additionally, a donor can pay medical expenses or tuition for an individual. Direct payment of medical expenses and tuition are not taxable gifts for gift tax purposes and are not required to be reported on a gift tax return. The payment of such expenses cannot be made to the individual but rather to the medical provider or educational institution. Medical payments can cover any type of deductible medical expense including health insurance. The payment of tuition does not include additional expenses such as books, room and boardand other related educational expenses. The direct payment of medical expenses and tuition does not have to be for the benefit of a related individual.