The question about how much money can you give away or not give away before being taxed by the IRS is perhaps the most common and the most confusing question that our clients will seek clarification. First, there is such thing as a gift tax. Its technical name is the Federal Estate and Gift Tax. Under this law, you are allowed to give away $14,000 each year without any gift tax liability. However, if you give away more than $14,000 in a given year, you will be required to file a Gift Tax Return with the IRS. In addition, it is the person that is giving away the $14,000 or more that must file the return, not the recipient of the gift.
However, it is important to note, that just because you make a gift in excess of $14,000 to a person or a combination of people, does not mean that you will owe taxes at the end of the taxable year. This is the most commonly misunderstood aspect of the gift tax.
As I stated above, the technical term for this tax is the Federal Estate and Gift Tax. In addition, this tax also governs the amount of assets that you can pass to your loved ones at your death. As of 2015, only those estates that are above $5.43 million are taxed at death. The implication of the gift tax is that, depending on the size of the gift, it may reduce your federal estate and gift tax exemption on your gross estate at your death.
So, what does this mean and why do you have to file a federal gift tax return when you give away more than $14,000 in a year as a gift? For example, let’s say you give away $24,000 as a gift to one of your adult children. Under the Federal Estate and Gift Tax, you will be required to file a gift tax return stating that you made a taxable gift in the amount of $10,000. However, you still would not be required to pay any taxes at the end of this taxable year. In this example, your federal estate and gift tax exemption of $5,430,000 would be reduced to $5,420,000. Therefore, if you died with a gross estate of $5.43 million, your estate would have $10,000 subject to the federal estate tax instead of having your entire estate exempt from the federal estate tax. However, if on the other hand your estate at your death was only worth $2 million, then you would not owe any federal estate taxes and would not owe any taxes for the $24,000 gift you made earlier in life to your adult child.The questions regarding the amount of money you can give away without being subjected to taxes is perhaps the topic that can lead to the most confusion. As the example above explains, just because you give away more than $14,000 in a given year, does not necessarily mean you will owe taxes on that gift. Whether or not you will owe taxes will depend upon the size of your estate on your death and how much of your federal estate tax exemption you have reduced by taxable gifts during your lifetime.