TurboTax / Tax Calculators & Tips / All Tax Guides / Tax Planning and Checklists / The Gift Tax Made Simple

The Gift Tax Made Simple

Updated for Tax Year 2014


OVERVIEW

If you make large enough gifts to relatives or friends, you might owe the federal gift tax. Here are the basics on how the tax works.


Get every deduction you deserve

TurboTax Deluxe searches more than 350 tax deductions and credits so you get your maximum refund, guaranteed.

Start for Free

The gift tax only kicks in after lifetime gifts exceed $5.34 million in 2014

The first thing to know about the federal gift tax is that gift givers—not gift recipients—have to pay it. Thankfully, you won’t owe the tax until you’ve given away more than $5 million in cash or other assets during your lifetime. The lifetime exclusion will be raised to $5.34 million starting in 2014. If you’re married, your spouse is entitled to a separate $5.43 million in 2015. So actually owing the gift tax is not a concern for most folks. But you may still have to file gift tax returns even though you don’t owe any tax. So please keep reading.

The annual gift tax exclusion provides additional shelter

The annual federal gift tax exclusion allows you to give away up to $14,000 in 2014 and 2015 to as many people as you wish without those gifts counting against your $5 million lifetime exemption.  (After 2015, the $14,000 exclusion may be increased for inflation.)

Say you give two favored relatives $20,000 each in 2014 and give another relative $10,000. The $20,000 gifts are called taxable gifts because they exceed the $14,000 annual exclusion. But you won’t actually owe any gift tax unless you’ve exhausted your lifetime exemption amount. Assuming you haven’t, the two taxable gifts simply reduce your lifetime exemption by $12,000 [($20,000 - $14,000) x 2 = $12,000]. The $10,000 gift is ignored, because it’s below the $14,000 annual exclusion.

If you give three individuals $14,000 each in 2014, these gifts are ignored because they don’t exceed the annual exclusion.

Gift taxes and estate taxes are connected

You have a $5.34 million federal estate tax exemption for 2014, thanks to the 2010 Tax Relief Act signed into law recently by President Obama. You can leave up to that amount to relatives or friends free of any federal estate tax. If you’re married, your spouse is entitled to a separate $5.34 million exemption. Beginning in 2011, the gift tax and the estate tax was reunified with an exclusion amount of $5.34 million for 2014.

Gifts made during your lifetime will reduce your taxable estate. However, gifts in excess of the annual exclusion also reduce your estate tax exemption. In the earlier example, the two $20,000 taxable gifts made in 2014 would reduce your estate tax exemption by $12,000 to $5,328,000 ($5,340,000- $12,000), based on the recently enacted changes in estate law. The $10,000 gift in 2014 and the three $14,000 gifts in 2014 would not reduce your estate tax exemption.

Bottom line: Making annual gifts up to the exclusion ($14,000 in 2014) is a good way to reduce your taxable estate without any negative side effects.

Special rule for 529 plan contributions

Contributions to a 529 college savings plan are gifts to the future student. However, a special rule allows you to make a lump-sum contribution and spread it over five years for gift tax purposes. For example, you can contribute $70,000 in 2014 to jump-start a 529 college savings account for your child. If you’re married, your spouse can do the same. You can spread the gift over 2014-2018 without incurring any gift tax and without reducing your $5.34 million lifetime gift tax exemption or your $5.34 million estate tax exemption. Your spouse can spread his or her $70,000 gift over five years as well. The only caveat: You can’t make any additional gifts to the same recipient during those years without using part of your $5.34 million exemption.

Some gifts are tax-exempt

Among others, the following types of gifts are exempt from the federal gift tax so you can make unlimited gifts in these categories without any gift tax or estate tax consequences and without having to file gift tax returns:

  • Gifts to IRS-approved charities
  • Gifts to your spouse (assuming he or she is a U.S. citizen)
  • Gifts covering another person’s medical expenses, as long as you make the payments directly to medical service providers
  • Gifts covering another person’s tuition expenses, as long as you make payments directly to the educational institution. (Payments for room and board, books, and supplies don’t qualify for this exception, but you can cover those costs by making a direct gift to the student under the annual exclusion.)

You many need to file a gift tax return

If you make a taxable gift (one in excess of the annual exclusion), you must file Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return. The return is required even if you don’t actually owe any gift tax because of the $5.34 million lifetime exemption. The return is due by April 15 of the year after you make the gift—the same deadline as Form 1040. If you extend your 1040 to October 15, the extended due date applies to your gift tax return too.

If you’re married, you can’t file a joint gift tax return. Each spouse must file a separate return if he or she makes any taxable gifts. You can, however, choose to “split” gifts with your spouse. Making a split gift allows you to take advantage of your annual gift tax exclusion plus your spouse’s exclusion for a gift that is made entirely by you.

For example, say you gave $28,000 to your child in 2014. By treating it as a split gift, you can completely shelter the gift with your $14,000 exclusion plus your spouse’s $14,000 exclusion. That way no gift tax is due, and the gift doesn't reduce the $5.34 million lifetime gift tax exemption in effect for 2014 or the estate tax exemption for you or your spouse. If you choose to make a split gift, you must file Form 709, and your spouse must consent to the arrangement.

A bigger story

This article only covers the basics of federal gift taxes. For more information, see IRS Publication 950: Introduction to Estate and Gift Taxes. See also the instructions for Form 709. You can find these documents on the IRS website at www.irs.gov.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

* Important Offer Details and Disclosures
  • Try for Free/Pay When You File: TurboTax Online pricing is based on your tax situation and varies by product. Actual prices are determined at the time of print or e-file and are subject to change without notice.
  • TurboTax CD/Download products: Price includes tax preparation and printing of federal tax returns and free federal efile of up to 5 federal tax returns. Additional fees apply for efiling state returns. E-file fees do not apply to New York state returns. Prices subject to change without notice.
  • TurboTax Mobile: Actual prices are determined at the time of print or efile and are subject to change without notice. Come back here before you file to confirm that the price has not changed, especially if it's been a while since you downloaded this app.
  • Anytime, anywhere: Internet access required; standard message and data rates apply to download and use mobile app features and content. TurboTax mobile app devices supported include Android 4.1 and above, iOS 8 on iPhone 4s and above, and iPad 2.
  • Fastest refund possible: Fastest tax refund with efile and direct deposit; tax refund timeframes will vary.
  • Pay for TurboTax out of your federal refund: A $34.99 Refund Processing Service fee applies to this payment method. Prices are subject to change without notice.
  • About our TurboTax Product Experts: Customer service and product support (phone or chat) vary by time of year. Phone support not included with Free Edition.
  • About our credentialed tax experts: Live tax advice service is available for your toughest tax questions; fees may apply. Service, experience levels, hours of operation and availability vary, and are subject to restriction and change without notice. Click here for full terms and conditions. Not available for TurboTax Business customers.
  • Get up to 10% on top of your federal refund: Amazon.com Gift Card offer is for federal refunds only. Limits apply ($2000 per e-card, maximum $10,000 per customer). Offer available only for TurboTax Online (except Federal Free Edition) or CD/download versions sold and shipped, or downloaded directly from Intuit or Amazon. Except as required by law, Amazon.com Gift Cards cannot be canceled, transferred for value or redeemed for cash.

    Amazon.com is not a sponsor of this promotion. Except as required by law, Amazon.com Gift Cards ('GCs') cannot be transferred for value or redeemed for cash. GCs may be used only for purchases of eligible goods at Amazon.com or certain of its affiliated websites. For complete terms and conditions, see www.amazon.com/gc-legal. GCs are issued by ACI Gift Cards, Inc., a Washington corporation. All Amazon ®, ™ & © are IP of Amazon.com or its affiliates. No expiration date or service fees.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2013 TurboTax products.
  • 4.8 out of 5 stars: Average based on customer ratings on TurboTax.com for TurboTax Online and CD/download products tax year 2014, as of January 2015.
  • Most Popular: TurboTax Deluxe is our most popular product among TurboTax Online users with more complex tax situations.
  • TurboTax CD/Download priority phone support: Priority phone support for TurboTax CD/Download Premier and Home & Business is accessible exclusively via the TurboTax.com Help Center.
  • Benefit Assist: After you file, TurboTax automatically shows you a full list of government benefits you may qualify for, like Food Stamps or reduced phone & utilities. Plus, we help you apply, saving you time and making it easier than ever to get more money! Estimate based on calculation of Benefit Assist users from tax year 2013 and published reports of average benefit and savings amounts from federal and state programs. Actual amounts and qualifications based on your individual situation; some individuals will not qualify. Feature may not be available for all customers.
  • Simplified State Experience: New, simplified state tax preparation available for most filers.
  • Eligibility for $25 cash back for returning Deluxe customers: Customers who have completed their 2013 taxes in TurboTax Deluxe (CD or download), and have completed their 2014 taxes in either TurboTax Premier or TurboTax Home & Business (CD or download), and apply here before 11:59PM PDT April 20, 2015, are eligible for $25 back. 2014 TurboTax Advantage users are ineligible for this offer. Terms and conditions are subject to change without notice.
  • $0 Upgrade Offer: Valid for customers who filed their 2013 taxes with TurboTax Deluxe (CD or download), completed prior year data transfer this year, and encounter an upgrade to either 2014 TurboTax Premier or 2014 TurboTax Home & Business (CD or download). Valid February 6, 2015 through April 20, 2015. TurboTax Advantage users are ineligible for this offer. This offer may not be combined with our $25 cash back offer. Terms and conditions are subject to change without notice.