Click Here to Learn How Morris-Hall PLLC is helping clients during the COVID-19 pandemic.

Annual Gift Tax Exclusion vs. Lifetime Gift Tax Exemption

Have you ever wondered how much money you can give to your family or friends without having to pay gift tax? You are not alone if the answer is yes! Below are some of the more common questions about gift tax, according to the Internal Revenue Service.

What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration is not received in return.

Who pays the gift tax?
The donor is generally responsible for paying the gift tax.

What can be excluded from gifts?

  1. Gifts that are less than the annual exclusion for the calendar year.
  2. Tuition or medical expenses you pay for someone.
  3. Gifts to your spouse.
  4. Gifts to a political organization for its use.

Gifts to qualifying charities are deductible from the value of the gift(s) made.

The federal gift tax has two “exclusions” or “exemptions.” These two include one that applies on an annual basis (annual gift tax exclusion) and the other that applies over the taxpayer’s entire lifetime (lifetime gift tax exemption). I often meet with clients that confuse these two, and mistakenly think that for 2013 Congress raised the $13,000 annual gift tax exclusion to $5,000,000.

The annual gift tax exclusion is the amount that can be given away by a taxpayer in any one year to any number of people free from any federal gift tax consequences. For 2013, the annual gift tax exclusion is $14,000 per person. So, as long as a lump sum gift or smaller gifts made to the same person in 2013 don’t exceed $14,000, there is no federal gift tax due.

In contrast, the lifetime gift tax exemption is the amount that can be given away by a taxpayer over his or her entire lifetime to any number of people that will be free from gift taxes but will reduce the amount that can be given away by the taxpayer tax free after death. For 2013, the lifetime gift tax exemption is $5,000,000, indexed for inflation, which is the same as the federal estate tax exemption. It’s important to remember that if you gift away any amount of your lifetime gift tax exemption, then this amount will be subtracted from your federal estate tax exemption after you die.

If you have questions or would like to schedule a free consultation, contact our office at 888.222.1328 today!

About Morris Hall:
At Morris Hall, we have focused our legal practice on estate planning for over 40 years.  Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, power of attorneys, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects.  We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Cave Creek, Tucson, Prescott, Flagstaff and Arrowhead.  Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.

5 Comments

  • sean says:

    Other web site indicate $5120k lifetime gift exclusion was expired 2012; it is 1 million in 2013. Which is correct? Thank you.

    • Morris, Hall & Kinghorn says:

      Hi Sean,

      They may have been writing that prior to 2013 perhaps. The law was set up to expire in 2013 and the exemption would return to $1 million. However, congress passed a new bill to keep the exemption at $5 million (as indexed for inflation). Hope that answers your question!

  • Gloria S. Valdez says:

    Very succinct and informative entry. I’m almost entirely clueless concerning estate and investment taxes. How does this apply to early withdrawal from a 401k or PERA account? My husband lost a well-paying job last week and it will take awhile to find an adequate replacement. We don’t have the adequate accessible savings to keep us afloat for three months. I hate to admit to that but truth is truth.

    • Morris, Hall & Kinghorn says:

      Hi Gloria,

      Unfortunately, I cannot answer this via web and would suggest that you meet with our financial department. They will provide you with a free consultation and will be happy to answer some questions over the phone as well. Their number is 602.257.0400.

      And don’t feel to bad, there are many people that have not set aside the funds for potential unemployment of other such difficulty. Hopefully he is able to find a job quickly and you will be back on your feet in no time!

  • Josef R. Smith says:

    I agree that Congress did not raise the annual allowed tax free amount to 5+million dollars. We have consulted a local estate attorney and he maintains that the annual allowable tax free amount is the 5+ million amount and can be applied in one year of giving. Do you know of anyone requesting an interpretation of the rule from the IRS in this regard and, if so where can one find a copy of the IRS interpretation?

Leave a Reply