The Gift Tax is the IRS’s way of preventing wealthy people from avoiding income and estate taxes. If rich people can just give away all their money right before they die, there wouldn’t be any estate to tax and the IRS would lose out on billions of dollars each year. The IRS gifting rules call for a limit: go over the limit when you give away money or property and you get hit with the gift tax. Call it the Estate Tax’s little helper.
History of the IRS Gifting Rules
Just before the IRS enacted the gift tax, a wealthy dude in the 1930s gave away $100 million before he died! And the entire intake of the estate tax that year was only $400 million. So, one very rich guy gave away what would have been 20% of the IRS’s estate tax revenue. If if you find this history stuff utterly fascinating, check out the source paper, called The Federal Gift Tax: History, Law, and Economics by David Joulfaian. It’s a very obvious tax-avoidance scheme, so in comes the gift tax to rescue the scene. That’s why we call it the Estate Tax’s little helper. IRS gifting rules prevent the estate tax from becoming obsolete.
In fact, the Gift Tax wasn’t enacted in order to create revenue for the US Treasure: it was created to bolster the Estate Tax. Kind of like ranching: the Gift Tax herds the taxpayers back into the estate tax pen by only allowing them in the gift tax pen up to a certain limit. That limit is called the gift tax exclusion. They want to avoid staying in the gift tax pen too long or they’ll get hit with the gift tax, so they head back into the estate tax pen. The IRS in this scenario is the cowboy, herding the cattle from corral to corral.
OK, Enough History Lesson: What are the IRS Gifting Rules?
You can give away money to anyone you want: friends, relatives, or charities, up to $14,000 for 2013 and pay no tax. As long as no single recipient gets more than the gift tax exclusion amount, the IRS gifting rules say no tax is paid. You can make as many gifts (under the exclusion amount) as you like during the year. There is no limit!
So, you can make 8 different gifts in 2013, each $10,000 and you pay no gift tax since none of the gifts are over the exclusion amount of $14,000.
If you give $15,000 to your sister, however, you’ll have to fill out IRS form 706 and report that extra $1000. Your over-the-limit tally is recorded over the years by submitting that form. Once you get to the lifetime exclusion amount you’ll start paying gift tax. But guess what the gift tax lifetime exclusion amount is currently set at? $5.25 million! And it will go up with inflation each year.
IRS gifting rules state that the exclusion amount will also rise each year, to keep up with inflation. It usually goes up by about $1,000 each year.