Consultant’s Corner: Tax Consequences of Making Gifts

Updated 4/4/17

Question: “It’s graduation season and I’m looking at making some substantial gifts. Do I need to be worried about how this will impact my taxes?”

Bona fide gifts are not includible in the gross income of the recipient, or donee, of the gift regardless of the amount of the gift. However, there is an annual gift tax exclusion and a lifetime gift tax exemption. Bona fide gifts made to any one person during the year that exceed the annual gift tax exclusion amount will have gift tax implications for the maker, or donor, of the gift. Also, gifts exceeding the annual gift tax exclusion amount can ultimately have estate tax implications for the donor of the gift.

As to the annual gift tax exclusion, it is the amount that can be given away by an individual in any given year to an unlimited number of people free from any federal gift tax consequences. In other words, a once-a-year gift or series of gifts made to the same person during the course of one calendar year that does not exceed the annual gift tax exclusion is considered a gift and excluded from any federal gift taxes. For the years 2013-2016, the annual gift tax exclusion has been $14,000.

In contrast, the lifetime gift tax exemption is the total amount that can be given away by an individual over his or her entire lifetime to any number of people that will be free from gift taxes, but the amount gifted will in turn reduce the amount that can be given away by the individual at death free from U.S. federal estate taxes. In other words, the lifetime gift tax exemption is tied directly to the federal estate tax exemption so that if you gift away any amount of your lifetime gift tax exemption, then this amount will be subtracted from your estate tax exemption when you die. Under the provisions of the American Taxpayer Act of 2013, the lifetime gift tax exemption will equal the federal estate tax exemption and will be indexed for inflation in future years. The lifetime gift tax and estate tax exemptions are $5,250,000 for 2013, $5,340,000 for 2014, $5,430,000 in 2015, $5,450,000 in 2016, and 5,490,000 in 2017.

Learn more by looking at the IRS’s resources on Estate and Gift Taxes.