Legal Definitions - gift-tax exclusion

The gift-tax exclusion refers to a specific amount of money or value of property that an individual can give to any other person within a calendar year without incurring federal gift tax or needing to report the gift to the Internal Revenue Service (IRS). This exclusion is applied per recipient each year. If a gift exceeds this annual limit, the giver typically needs to file a gift tax return, though they might not owe tax immediately if they have a lifetime exemption available.

Here are some examples illustrating how the gift-tax exclusion works:

• Example 1: Financial Gift to One Person

  A father wants to help his son purchase a new car. In a given year, he transfers $18,000 directly to his son's bank account. Assuming the annual gift-tax exclusion for that year is $18,000 per person.

  Explanation: Since the gift amount ($18,000) is exactly equal to the annual gift-tax exclusion, the father does not owe any gift tax, nor is he required to file a gift tax return with the IRS. The entire gift falls within the excluded amount.

• Example 2: Gifts to Multiple Recipients

  A grandmother decides to give each of her three grandchildren a financial gift for their college expenses. In the same year, she gives $18,000 to grandchild A, $18,000 to grandchild B, and $18,000 to grandchild C.

  Explanation: The gift-tax exclusion applies per recipient. Even though the grandmother gave away a total of $54,000 ($18,000 x 3), each individual gift to each grandchild is within the annual exclusion limit. Therefore, she does not owe any gift tax and does not need to file a gift tax return for these gifts.

• Example 3: Joint Gift from a Married Couple

  A married couple wants to help their nephew with a down payment on his first home. Together, they give their nephew $36,000 in a single transaction.

  Explanation: Because the gift-tax exclusion applies per donor and per recipient, each spouse can utilize their individual annual exclusion. If the annual exclusion is $18,000, the husband can give $18,000 tax-free, and the wife can also give $18,000 tax-free to the same nephew. Their combined gift of $36,000 falls entirely within their combined annual exclusions, meaning no gift tax is due and no gift tax return is required (assuming they elect to split the gift, which is common for married couples).