The Maximum Amount of a Gift Without Tax Consequences

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The Maximum Amount of a Gift Without Tax Consequences
Gift and estate taxes follow some of the most complex rules in the U.S. tax code. (tax time image by Tom Oliveira from

According to United States tax codes, federal tax may be imposed on gifts over a certain level. The giver, not the recipient, is liable for these taxes. There are two calculations that determine whether you owe tax on money you have given away: the amount you have gifted within a year, and the total amount you have given over a certain annual level during your lifetime.

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Annual Gift Limit Without Tax Consequences

As of 2011, each person may give up to £8,450 to any other individual with no tax consequences. The level is indexed to inflation and changes frequently, so if you need to give away a higher amount, check the Internal Revenue Service gift tax rules for the appropriate level. You may give up to the £8,450 limit to as many individuals as you like; for example, if you have three children, you may give each of them £8,450 for a total of £25,350 without incurring tax penalties. If you and your spouse are both involved in the gift, the annual limit doubles

Gifts Over The Annual Limit

If you give more than £8,450 to any single individual, you must file an IRS Form 709 with your taxes to report the gift. You must also keep a running total of the amount given to that individual every year. Don't worry about the full amount you gave the individual; instead, worry about how much you gave them over the £8,450 limit. For instance, if you gave your daughter £9,750 in 2002 -- when the limit was only £6,500 -- your taxable gift amount was £3,250. If you subsequently give her £13,000 in 2011, your running taxable total will become £7,800 - £3,250 plus £4,550. Be certain to keep this running total separate for each individual.

Lifetime Limit

Even when you have given over the annual exclusion amount, you do not automatically incur gift tax. Instead, the taxable amount is calculated for a lifetime level. Only when you reach £0.6 million, as of 2011, in taxable gifts do you have to worry about taxes. Until that point, the "unified credit," a tax credit applied to your entire lifetime tax record, eliminates any gift tax you may have incurred. For this reason, you may give your daughter £6,500 every year for 40 years and never worry about taxes at all -- but if you give her £260,000 in a single year, you will have used up over a third of your unified credit for her.

Spousal Gifts

Spouses may freely give as much as they want to one another without incurring any tax penalties at all, with only one exception. If your spouse is not a citizen of the United States, the IRS limits your annual gifts to her. In 2010, this limit was £87,100. Amounts in excess of this within a single year must be reported on the Form 709, and this overage is counted against your lifetime exclusion.

Gift Tax and Estate Planning

Gift tax is set up in this manner to prevent people in their later years from dodging estate tax by giving away their possessions. If, however, you set up estate planning relatively early in your life, you will be able to include untaxed gifts to maximise the portion of your estate that remains untaxed. Because these gifts can include things like business or property shares, over time you can transfer large portions of real estate and businesses as well as cash to your heirs without incurring taxes, ensuring the smooth transfer of your wealth without IRS issues.

State Gift and Estate Taxes

Of course, federal taxes are only part of the gift tax puzzle. Many states also impose gift and estate taxes on their citizens. Before using the gift tax as part of estate planning, learn the rules of your state in order to avoid unanticipated future problems.

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