Annual Exclusion Update
I was talking with a reader from North Carolina today about our post from yesterday. He was not sure if the annual exclusion amount was or was not included in the lifetime. So, I have decided to do one more update on this subject.
The first $13,000 ($14,000) of gifts that you give to everyone person each year are exempt for any gift taxation. It is only when you go above the this level, that you then start to eat into the lifetime exclusion.
For example, if you give $12,000 of cash to Jim and $15,000 of cash to Jane, Jim’s gift is part of the annual exclusion and is not reported to the IRS at all. Jane’s gift must be reported to the IRS on form 709 and the first $13,000 is exempt and the remaining $2,000 is then used to reduce the lifetime exclusion. For 2012, assuming you had never made any gifts, your lifetime exclusion would drop from $5,120,000 to $5,118,000 after filing the gift tax return.
In brief, if you make gifts under $13,000, no reporting to IRS and no reduction in your lifetime exclusion. For gifts over $13,000, only the amount over $13,000 is used to reduce your lifetime exclusion amount.
Remember that these rules are on a donee by donee basis. So 10 gifts of $12,000 to 10 children/grandchildren/friends are both not reported to the IRS and do not reduce your lifetime exemption.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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