The answer is one of my great attorney answers: “It depends.” In general terms, there is no gift tax in New York. So for the remaining part of the discussion, we will be focusing on federal gift and estate taxes.
It’s actually what’s referred to as a uniform gift and estate tax. That means you have a $5.43 million exemption. Whatever you don’t give away during your lifetime, you can give away (tax-free) upon your death. The IRS just wants to keep tabs on what you give away during your lifetime so they know how much of an exemption you have left when you die.
With respect to gifting, there are really two “trigger points” as far as the IRS is concerned. The first is if you give more than $14,000 in cash, property or gifts to anyone within the tax year, you must report the gift to the IRS. It doesn’t matter whether you made the gift to family members or total strangers. But whether you have to pay a gift tax will depend on the total amount of gifts that you’ve made during your lifetime. That’s trigger number two.
You also need to remember that it’s only the gift giver that may have to file the IRS form and report the gift. The person giving the gift, not the recipient, is responsible for paying the tax. And, as a side note, from the recipient’s point of view, gifts from family and friends are not considered income, so there’s no income tax. That’s true no matter how high the value of gifts you receive in a given year.
That $14,000 worth of assets each year you gift is called the annual exclusion and you don’t have to tell the IRS about it – so no gift tax form. Any gift above this amount will count against your lifetime exemption from gift or estate tax.
If you exceed this exemption amount (sometimes called the “unified credit” or the “basic exclusion”) you could wind up owing gift tax of 40% or more. Even if you don’t, remember that your lifetime gifts reduce how much you can pass tax‑free through your estate plan.
Now a great thing about married couples is that the usual limits on lifetime gifts don’t apply. If your spouse is a U.S. citizen, there’s an unlimited marital deduction for most gifts, even if they exceed the annual exclusion amount and you generally are not required to file a return.
Another important tax break is that married couples can combine both their annual exclusions. This is called gift‑splitting. By using the annual exclusion this way, they can jointly give away up to $28,000 to as many people as they want each year without dipping into the $5.43 million lifetime allotment. Ordinarily couples must then file a gift tax return and consent, on each other’s returns, to gift‑split. And because we’re talking about gifting under the federal laws, all these rules now apply to legally married, same‑sex couples.
If you pay a friend or family member’s tuition, dental or medical expenses (including health insurance premiums), it won’t count against either the annual exclusion or your $5.43 million exemption, and you won’t have to file a gift tax return. The only catch is that you must make those payments directly to the service provider, such as the school, doctor or insurance company. This is a great way for parents or grandparents to lower their estate and tax liabilities.
As far as filing the actual gift tax form, if you didn’t file gift tax returns for past tax years, it’s never too late to file one. As a general rule, you have until the IRS catches the problem. And besides, if you’re not liable for gift tax, there’s no penalty for late filing.
Keep in mind that since the $5.43 million lifetime exemption from gift tax and any gift tax you pay are cumulative, you must keep the returns indefinitely. Your heirs need them to calculate the tax, if any, on your estate. And the most likely time for the IRS to flag unreported gifts or to question the value of the gifts you made is after you die. So, do everyone a favor and make sure you leave all the documentation behind.