Note: Some of the content of this video applies only to taxes prepared prior to 2012. It is included here for reference only. Find out the tax guidelines about gifting with help from TurboTax in this video on tax tips.
Video transcript:
Hello, I'm Sara from TurboTax with some information about how the federal gift tax works.
Most people are unfamiliar with the gift tax rules but for good reason. The average tax payer rarely encounters it. Here's why. Most of the gifts you make are usually excluded from what the IRS terms taxable gifts. These include all gifts you make to your spouse, most donations to political organizations, any medical or tuition bill you pay for someone else and most importantly, all other gifts that do not exceed the annual exclusion amount.
This annual exclusion is key to avoiding the gift tax. Essentially the government determines the amount of annual tax for gifts you can make to each person. Currently this amount is $13,000.
It works like this. Suppose you decide to give your son a check for $15,000 this year. Right away you can exclude $13,000 which leaves you with a $2,000 taxable gift. But don't worry, because of the unified credit, you probably don't need to pay tax on the $2,000 either.
Generally you get a one time credit of $1,000,000 in addition to the annual exclusions. So if you use $2,000 of the credit to eliminate tax on the gift to your son, you then have $998,000 left to use on all future gifts. Except for the very wealthy and very generous, most people will never hit the $1,000,000 mark and so won't be subject to the gift tax.
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