The new tax law signed earlier this year—the American Taxpayer Relief Act (ATRA)—bestowed valuable estate and gift tax benefits on taxpayers. But a longtime gift tax break may have gotten lost in the shuffle.
Strategy: Continue to give lifetime gifts to family members. No gift tax is due if you qualify under the annual gift tax exclusion. And you can repeat this strategy year in and year out.
The gift tax exclusion, which wasn’t affected by ATRA, is adjusted for inflation in $1,000 increments.
Here’s the whole story: Under the annual gift tax exclusion, you can give gifts of cash or property to a person, up to a specified amount, without any gift tax consequences. Good news: The exclusion amount for 2013 is $14,000 (up from $13,000 in 2012). So, you can give someone cash and/or property valued at up to $14,000 before the end of this year, completely free of gift tax. You don’t even have to file a gift tax return.
Note that the annual exclusion is doubled for joint gifts made by a married couple or when one spouse consents to a gift by the other. For instance, a couple could give a child or grandchild up to $28,000 gift tax-free in 2013. However, you must file a gift tax return for these joint gifts.
The gift tax exclusion allows you to methodically reduce your taxable estate without eroding your lifetime gift tax exemption.
Example: You and your spouse own a total of $11.5 million in assets, have three adult children and seven grandchildren. Beginning in 2013, you give $28,000 to each one of your 10 offspring each year for five consecutive years. At that point, you will have reduced your joint estate by $1.4 million ($28,000 × 10 × 5), leaving you with an estate of $10.1 million (plus earnings in the interim).
Tip: If you exceed the annual gift tax exclusion, the lifetime gift tax exemption covers the excess, up to the generous $5 million limit per spouse (indexed to $5.25 million in 2013).