That Federal Gift Tax exclusion amount is scheduled to increase to $14,000 in 2013. This permits individuals to gift $14,000 to any number of persons each year, free of Federal Gift Taxes and without the requirement to report those gifts to the IRS.
Any amounts gifted in excess of the annual exclusion amount would reduce the lifetime exclusion from Federal Gift Taxes. That lifetime exclusion amount is $5,120,000 in 2012. However, that figure may change in 2013 as this current lifetime exclusion amount is scheduled to expire at the end of 2012. If no agreement is reached in Congress to continue the current lifetime exclusion amount, it may be reduced to $1,000,000 in 2013.
Many individuals gift within the annual exclusion ($13,000 in 2012) in an effort to reduce the size of their estate that could be subject to both Federal and state inheritance taxes. Imagine a couple with five (5) children and ten (10) grandchildren. A couple can gift $26,000 this year to each child and grandchild. If fifteen (15) people receive $26,000 in 2012, that would reduce a person’s taxable estate by $390,000 in 2012. None of those gifts are subject to the IRS reporting requirements or any Federal Gift Tax. Keep in mind that gifts for tuition expenses and medical expenses as defined by IRS regulations do not have a cap on the amount that can be gifted free from Federal Gift Taxes.
Contact an attorney at Marshall, Parker & Associates or talk to your financial advisor about whether gifting within the Federal Gift Tax exclusion makes sense for you.