Estate Planning: Gift Taxes and Exemptions - T. Rowe Price
Also known as the lifetime gift tax exemption equivalent amount, this is the total amount per donor that can be transferred to others (other than the spouse) - over and above the amount of any gifts made that year that are eligible for the annual gift tax exclusion ($13,000 per recipient). The exemption for 2011 and 2012 is $5 million and is scheduled to change in 2013 to $1 million unless Congress intervenes. Also, to the extent that you make taxable gifts during your lifetime, the federal estate tax exemption amount for your estate will be reduced in an equivalent amount. Bear in mind that gifts to spouses and charities are not deemed to be taxable gifts and that special rules apply to spouses who are non-US citizens.

The total gifts made that exceed the exemption amount while the donor is living will be counted against your personal $5 million or joint $10 million lifetime exemption amount and any excess gift will be taxed, depending on its value, up to 35% of the value of the gift. Please be aware that certain states also apply gift taxes and may have different annual exclusion amounts than the $13,000 described above.

For 2013, you can make a gift of up to $14,000 to any person without having to use any of your lifetime gift tax exemption. If you exceed this amount to any one individual in 2013, the excess may be considered a taxable gift, and you will have to file IRS forms. However, whether your estate will owe any taxes at your death depends on many factors, including the total amount of taxable gifts made during your lifetime and the amount of your taxable estate. For example, if your taxable gifts totaled $2.0 million and were made in 2011, your estate should not incur federal estate taxes if you died in 2013 assuming that your taxable estate did not exceed $3.25 million (or potentially up to $8.5 million if your spouse died before you and your estate is eligible to utilize the unused portion of your spouse's estate tax exemption).

Generally, you can assume that most gifts are counted against your lifetime gift tax exemption; however, the following types of gifts are not counted against your exemption amount:

  • Gifts to an individual that do not exceed the annual exclusion amount per individual ($14,000 for 2013)
  • Tuition or medical expenses you pay directly to the provider for the benefit of someone else
  • Gifts to your spouse, assuming spouse is a U.S. citizen
  • Gifts to a political organization for its use
  • Gifts to qualified charities

For gifts that do not fit into these categories, the amounts will be counted against your lifetime exemption amount and any excess gift will be taxed at the then-current rate, currently 40%. You will be responsible for paying the gift tax, unless you have made special arrangements with the person receiving the gift to pay the tax instead.

Please be aware that certain states also apply state gift taxes. Before making any sizable gifts during your lifetime, make sure to consider how these gifts might affect your estate and any possible federal or state tax ramifications. Be sure to consult an estate planning attorney who practices in your state of legal residence.