Annual Gift Tax Exclusion
Gifts from a donor to a recipient might be subject to gift taxes, which are paid by the donor. Gifts to the donor’s spouse are not subject to gift taxes, nor are direct payments of tuition to an educational institution or direct payments of medical expenses. Donors can give up to the annual gift tax exclusion amount to each recipient without incurring gift taxes.
The annual gift tax exclusion was $14,000 in 2017. The annual gift tax exclusion is adjusted annually for inflation and rounded to the nearest multiple $1,000. The annual gift tax exclusion has been $14,000 since 2013 and is now $15,000 for 2018. Also, a married couple can give up to twice the annual gift tax exclusion to each recipient.
529 college savings plans allow for five-year gift tax averaging, where lump sum contributions to a 529 plan are treated as occurring ratably during a five-year period, starting with the tax year in which the contribution is made. Accordingly, contributions to a 529 plan can be up to five times the annual gift tax exclusion amount.
Note that the annual gift tax exclusion is per recipient. Grandparents can make gifts to each grandchild up to the annual gift tax exclusion amount.
If a donor makes contributions to a recipient that exceed the annual gift tax exclusion amount, including five-year gift tax averaging, the donor will need to file a gift tax return, IRS Form 709. This may yield a gift tax liability.
If there is a gift tax liability, in most cases the donor will use part of their lifetime estate and gift tax exclusion. The lifetime estate and gift tax exclusion is currently $5.6 million.