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.