The gift tax is the second of the taxes that make up the transfer tax system along with the Estate Tax and Generation Skipping Tax. The gift tax applies to gifts or transfers made during your life that exceed an excluded amount.

The gift tax was first imposed in 1932 as a means to prevent taxpayers from giving away their estate before dying in order to avoid estate taxes. Key terms are:

  • Maximum Tax Rate – The maximum rate at which the transfer will be taxed
  • Applicable Annual Exclusion – The amount of property that a person can transfer free from tax each year
  • Applicable Exclusion – The amount of property that a person can transfer free from tax over their lifetime
  • Unified Credit – The amount of the tax on the transfer subject to the applicable annual exclusion

As a result of the Economic Growth and Tax Reconciliation Act of 2001 (EGGTRA) Congress modified the transfer tax rates and applicable exclusion amounts. The gift tax rates and exclusion amounts are as follows:

Year Maximum Tax Rate Applicable Exclusion Amount
2001 55% $675,000
2002 50% $1,000,000
2003 49% $1,000,000
2004 48% $1,000,000
2005 47% $1,000,000
2006 46% $1,000,000
2007 45% $1,000,000
2008 45% $1,000,000
2009 45% $1,000,000
2010 35% $1,000,000
2011 35% $5,000,000
2012 35% $5,120,000
2013 40% $5,250,000
2014 40% $5,340,000
2015 40% $5,430,000

The applicable exclusion amount is a combined exclusion for gift and estate taxes and any amount not used for gifts will apply in calculation of estate taxes due, if any.

Under the terms of EGGTRA it was scheduled to expire December 31, 2010 and as of January 1, 2011 the rates and exclusion amounts were slated to revert back to the 2001 figures. However, due to the newly enacted Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 the maximum rate is 35% and the applicable exclusion is $5,000,000 for years 2011 and 2012.

In addition to the applicable lifetime exclusion amount each taxpayer is also entitled to an annual exclusion. This means that every year you can give away a specified amount to an unlimited number of people without any gift tax consequences. The annual exclusion is not cumulative, thus if you do not make a gift during a given year the exclusion is lost and does not carry forward. The annual exclusion amount is indexed for inflation and is as follows:

Year Applicable Exclusion Amount
2001 $10,000
2002 $11,000
2003 $11,000
2004 $11,000
2005 $11,000
2006 $12,000
2007 $12,000
2008 $12,000
2009 $13,000
2010 $13,000
2011 $13,000
2012 $13,000
2013 $14,000
2014 $14,000
2015 $14,000

Having a gift plan in place as part of your overall estate plan is a good tool towards reducing or eliminating estate taxes. Some of the most common gifting techniques are:

  • Outright – By making gifts of the annual exclusion amounts the funds are no longer owned by you and at death lower your estate tax liability.
  • Gift Splitting – Spouses can each gift the exclusion amount separately or one spouse may make a gift that is double the annual exclusion and elect to have the gift split with the consent of the other spouse.
  • Education Expenses – You can pay for the tuition expense of another if the payment is made directly to the qualifying institution in an unlimited amount. Not included are expenses for books, housing, fees and supplies.
  • Medical Expenses – You can pay qualified medical expenses on behalf of another in an unlimited amount as long as the payment is made directly to the medical provider.
  • Crummey Trust – You can make annual exclusion gifts to a trust established by you for the benefit of another. The IRS rules require that the beneficiary be given notice of the gift and a limited opportunity to withdraw the gift. If the funds are not withdrawn then the gift will be governed by the terms of the trust.
  • Minor’s Trust – If specific requirements are met, you can give the annual exclusion amount to a trust established by you for the benefit of a minor. The trust must terminate when the minor reaches 21 and the trustee must have authority to make payments to the minor during the term trust term.

A gift tax return must be filed for any taxable gift by April 15 of the year following the year in which the gift was made. An actual tax payment is not required unless the gift exceeds the lifetime applicable exclusion combined with taxable gifts from prior years.

While the gift tax as presented herein appears fairly straightforward, in actuality the rules, regulations and law are arduous, complex and subject to strict compliance requirements. Therefore, any actions taken in furtherance of gift tax planning should only be undertaken after consultation with an experienced attorney.