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Money April 2014

Legal Ease

Everything You Want and Need to Know About Gift Taxes

By Jonathan J. David

If the gift exceeds $14,000, then a gift tax return needs to be filed reporting the gift. Also, if spouses split their gifts, even though there is no taxable gift involved, they must file a gift tax return.

Dear Jonathan: Now that 2014 has arrived, are there any changes to the annual gift tax exemption or the estate and gift tax applicable exemption amounts?

Jonathan Says: In 2014, the annual gift tax exemption remains at $14,000. This means that an individual can make $14,000 gifts to as many people as he or she wants without incurring any gift tax liability or having to file a gift tax return. In the case of a husband and wife, they can make a joint gift of $28,000 (this is known as gift splitting because the gift is considered to have been made one-half by each spouse) without incurring any gift tax consequences.

If the gift exceeds $14,000, then a gift tax return needs to be filed reporting the gift. Also, if spouses split their gifts, even though there is no taxable gift involved, they must file a gift tax return.

The estate and gift tax applicable exemption, which was $5,250,000 in 2013, is $5,340,000 in 2014. What this means is that in addition to the $14,000 annual gifts a person can make without gift tax consequences, a person can gift during lifetime or at death up to $5,340,000 without any estate or gift tax consequences. Bear in mind, however, if a person makes a gift of $3,000,000 during lifetime, it will serve to reduce that person’s estate tax exemption amount by $3,000,000 when that person dies. For example, if a person makes a gift of $3,000,000 in February of this year and then dies prior to the year’s end, that individual’s estate tax exemption will be reduced by $3,000,000 to $2,340,000.

 

Dear Jonathan: Is the estate and gift tax applicable exemption amount the same for individuals and married couples?

Jonathan Says: Yes, but in the case of a married couple, each of them would be entitled to the full estate and gift tax applicable exemption amount, which, for 2014, is $5,340,000.

 

Dear Jonathan: My estate has grown to be rather large, and I have decided I want to start making gifts to my children and my grandchildren, which totals 22 individuals. I know that I can make gifts of $14,000 to each of them this year, but I was hoping to actually make larger gifts. What happens if I do?

Jonathan Says: Any gifts you make to an individual in excess of the $14,000 annual exemption amount will be deemed to be a taxable gift and the excess amount will serve to reduce your estate and gift tax applicable exemption amount of $5,340,000 by the total amount of taxable gifts made this year. For instance, if instead of giving $14,000 to each of your children and grandchildren you make $25,000 gifts to each one of them, this would mean that you will have made 22 taxable gifts of $11,000 each ($25,000 minus $14,000), and that total amount of $242,000 will be subtracted from your estate and gift tax exemption amount of $5,340,000.

You will also need to report the taxable gifts by filing a gift tax return.

 

Jonathan J. David is a shareholder in the law firm of Foster, Swift, Collins & Smith, PC, 1700 East Beltline, N.E., Grand Rapids, Michigan 49525.

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