The IRS instructions to Form 709 Gift Tax Return spell out the general rules for allocating the unified credit to prior gifts. For 2017, the annual gift tax exclusion is $14,000. That means you can give up to $14,000 to as many different people as you want as a gift without being subject to gift tax rules.
The basic or lifetime exclusion amount is $5,450,000 (2016) and $5,490,000 (2017).
If you give someone money or property during your life, you may be subject to the federal gift tax. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity.
If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. Gift tax returns (IRS Form 709) do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.
Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, the recipient of the gift will not have to pay income tax on the value of the gift received making the concept of gifting a valuable family estate planning tool. Making a gift does not ordinarily affect your federal income tax.
You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).
The general rule is that any gift is a taxable gift and IRS form 709 must be filed. However, there are many exceptions to this rule identified in the instruction set. The following gifts are not taxable gifts and do not require the filing of IRS form 709:
- Gifts that are not more than the annual exclusion for the year,
- Tuition or medical expenses you pay directly to a medical or educational institution for someone,
- Gifts to your spouse,
- Gifts to a political organization for its use, and
- Gifts to charities.
Gift Splitting – you and your spouse can make a gift up to $28,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion. You must also file a gift tax return on Form 709, if any of the following apply:
- You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
- You and your spouse are splitting a gift.
- You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
- You gave your spouse an interest in property that will terminate due to a future event.