Legal Definitions - annual exclusion gift

An annual exclusion gift refers to a transfer of money or property from one person to another that falls within a specific monetary limit set by the federal government each year. Gifts made within this annual limit are not subject to federal gift tax and do not reduce the donor's lifetime gift tax exemption. This allows individuals to make tax-free gifts up to the specified amount to as many recipients as they wish each year, without incurring gift tax obligations for either the giver or the receiver.

Here are some examples illustrating how the annual exclusion gift works:

• Financial Assistance for a Major Purchase:

  Mr. and Mrs. Davies want to help their adult son, Mark, with the down payment on his first home. Assuming the annual gift tax exclusion for the year is $18,000, Mr. Davies gives Mark $18,000, and Mrs. Davies also gives Mark $18,000. In total, Mark receives $36,000. Because each parent is a separate donor and each gift ($18,000 from Mr. Davies to Mark, and $18,000 from Mrs. Davies to Mark) is within the annual exclusion limit, neither Mr. nor Mrs. Davies needs to report these gifts to the IRS, and no gift tax is owed.

• Transfer of a Valuable Tangible Asset:

  Aunt Carol owns a vintage motorcycle valued at $17,500. She decides to give it to her nephew, David, who is an avid collector. If the annual exclusion limit for the year is $18,000, Aunt Carol's gift of the motorcycle to David falls entirely within this limit. She does not need to file a gift tax return, and David receives the motorcycle without any gift tax implications.

• Regular Gifting to Multiple Individuals:

  Grandparents Eleanor and Frank have two grandchildren, Sarah and Tom, and they wish to contribute to their college savings accounts annually. If the annual exclusion limit is $18,000, Eleanor can give $18,000 to Sarah and $18,000 to Tom. Similarly, Frank can also give $18,000 to Sarah and $18,000 to Tom. In this scenario, each grandchild receives $36,000 per year ($18,000 from Eleanor + $18,000 from Frank). Since each individual gift from each donor to each recipient is within the annual exclusion limit, no gift tax returns are required, and no gift tax is incurred by anyone.