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The Annual Gift Tax Exclusion

© Susan M. Weschler

Did you know that the IRS allows each person the right to make an unlimited amount of small gifts each year and not pay gift or estate taxes on them? It's known as the "annual gift tax exclusion", and you can give up to $10,000 each to any person, per year. The annual gift tax exclusion is not limited in number, so you can give to one person, or 100 people.

Taxable gifts do not require any tax payment, until the cumulative total of the donor's (the person making the gift), lifetime taxable gift exceeds his "applicable exclusionm amount". This is dollar amount, like a credit, that can be used against federal gift and estate taxes. For persons dying in 2000 and 2001, this amount is $675,000. In effect, you could give away or transfer up to $675,000 of property during your lifetime and avoid paying any gift or estate taxes. This exclusion amount increases gradually over the next few years, until 2006 and later, when it reaches the maximum of $1,000,000.

Under current law, individuals can make a gift to anyone. This means that you can give to your children, relatives, friends, and even total strangers each year. This type of gifting can go a long way to passing along a portion of your estate without incurring any estate or gift taxes. Gifts can include not only cash, but also other types of property or assets.

The gift tax annual exclusion is an estate planning tool that can be used to reduce estate taxes, and at the same time, keep assets within the family. For example, if you have two children, you can gift $10,000 to each child, each year without incurring any gift or estate taxes. This is one way in which people set aside money for their children's education each year.

In addition to saving on taxes by making these annual gifts to your children or grandchildren, or to their trust, you are also reducing the size of your estate, because these assets may appreciate. By removing some appreciating assets, you are also saving on future estate taxes.

If you and your spouse decide to combine your gifts you can gift each child $20,000 or a total of $40,000 each year. When spouses share in annual gifts, it is called "gift splitting". The gift is split if the other spouse agrees to share in the gift. A gift tax return must be filed in the year the gift is made when spouses share in a gift or split a gift.