By Tom Herman
Q: I recall a few years ago some IRS program having to do with
an individual giving a gift of up to $10,000, I believe, to a
family member, with no tax advantage or disadvantage. Do you recall
this program?
J.E.P., Georgetown, Texas
A:I think you are inquiring about a tax-law provision known as
the annual gift-tax exclusion amount, which can play a significant
role in the estate-planning arsenal of many wealthy people. The
amount, which is subject to inflation adjustments, is $14,000 for
this year, not $10,000.
For many upper-income Americans, this can be a simple,
tax-efficient and generally hassle-free way to transfer wealth to
anyone they choose, not just family members. Here is the gist of
how it works:
You typically can hand out as much as $14,000 this year to
anyone (even a stranger)--and to each of as many people as you
wish--without any tax considerations or paperwork requirements. You
don't have to report your generosity to tax officials, and the
recipients don't owe income tax on your gift--as long as it's
genuinely a gift and not a form of disguised payment for goods or
services provided by the recipient.
"This is an annual exclusion amount," not a lifetime limit, says
Catherine Grevers Schmidt, partner at New York law firm Patterson
Belknap Webb & Tyler. "You can give up to $14,000 to each
recipient each year. Every Jan. 1, the clock resets, and you can
give that person another $14,000."
Some readers may see the word "gift" and wonder whether they can
deduct it on their federal income-tax returns. No, Ms. Schmidt
says: "There is no income-tax deduction for the donor."
You can't deduct any gifts unless you itemize deductions and the
gifts go to genuine charitable and educational organizations. For
details, visit the IRS website ( www.irs.gov) and search under
"annual gift tax exclusion." For example, see answers to
"Frequently Asked Questions on Gift Taxes."
Most Americans don't have to worry about federal estate or gift
taxes. For this year, the lifetime exclusion from federal estate
tax and gift tax is $5,340,000. (Also, transfers between spouses
typically aren't subject to tax.) But even if your estate is much
smaller than that, you might find the annual gift-tax exclusion
helpful to know about because of state estate-tax
considerations.