Gifts are subject to a federal tax, but an exemption is available to shelter cumulative gifts within the threshold (currently $5,490,000). However, some gifts are outside the tax’s scope, including gifts qualifying for the annual exclusion, which allows a donor to make gifts having a value up to $14,000 per person per year. The amount is adjusted for inflation in $1,000 increments.
The number of beneficiaries receiving annual exclusion gifts per donor is unlimited so that consistent gifts over time can significantly reduce a donor’s taxable estate.
Excluded gifts do not need to be reported on a gift tax return, unless the donor made other gifts or wants to make certain elections, e.g., the election to “split” gifts with one’s spouse. With gift splitting, each spouse consents to have his or her exclusion applied to the other spouse’s gifts thereby doubling the maximum amount available.
Gifts only qualify for the annual exclusion if the donee has immediate access to the property or a legal exception is met. This “present interest” requirement means that outright gifts typically qualify, but gifts in trust may not. An example of an exception is a 529 plan contribution.
Updated February 2017