Here are some gifts that are not considered "taxable gifts" and, therefore, do not count as part of your $5.34 million lifetime total.
- Present-interest gift of $14,000 in 2014. "Present-interest" means that the person receiving the gift has an unrestricted right to use or enjoy the gift immediately. In 2014 you could give amounts up to $14,000 to each person, gifting as many different people as you want, without triggering the gift tax.
- Charitable gifts
- Gifts to a spouse who is a U.S. citizen. Gifts to foreign spouses are subject to an annual limit of $143,000 in 2014. This amount is indexed for inflation and can change each year.
- Gifts for educational expenses. To qualify for the unlimited exclusion for qualified education expenses, you must make a direct payment to the educational institution for tuition only. Books, supplies and living expenses do not qualify. If you want to pay for books, supplies and living expenses in addition to the unlimited education exclusion, you can make a 2014 gift of $14,000 to the student under the annual gift exclusion.
Example: In 2014, an uncle who wants to help his nephew attend medical school sends the school $16,000 for a year's tuition. He also sends his nephew $14,000 for books, supplies and other expenses. Neither payment is reportable for gift tax purposes. If the uncle had sent the nephew $30,000 and the nephew had paid the school, the uncle would have made a reportable (but maybe not taxable) gift in the amount of $16,000 ($30,000 less the annual exclusion of $14,000) which would have reduced his $5.34 million lifetime exclusion by $16,000.
The gift tax is only due when the entire $5.34 million lifetime gift tax amount has been surpassed.
Payments to 529 state tuition plans are gifts, so you can exclude up to the annual $14,000 amount. In fact, you can give up to $70,000 in one year, using up five year's worth of the exclusion, if you agree not to make another gift to the same person in the following four years.
Example: A grandmother contributes $70,000 to a qualified state tuition program for her grandchild in 2014. She decides to have this donation qualify for the annual gift exclusion for the next five years, and thus avoids using a portion of her $5.34 million gift tax exemption.
- Gifts of medical expenses. Medical payments must be paid directly to the person providing the care in order to qualify for the unlimited exclusion. Qualifying medical expenses include:
- Diagnosis and treatment of disease
- Procedures affecting a structure or function of the body
- Transportation primarily for medical care
- Medical insurance, including long-term care insurance
In addition to these gifts that are not taxable, there are some transactions that are not considered gifts and, therefore, are definitely not taxable gifts.
- Adding a joint tenant to a bank or brokerage account or to a U.S. Savings Bond. This is not considered to be a gift until the new joint tenant withdraws funds. On the other hand, if you purchased a security in the names of the joint owners, rather than holding it in street name by the brokerage firm, the transaction would count as a gift.
- Making a bona fide business transaction. Even if you later find out that you paid more than the item was worth based on its fair market value, the transaction is not a gift; just a bad business decision.