The regulations for giving gifts are one of the most misunderstood pieces of our tax code. With recent changes, now is the time to discuss and debunk some mistaken impressions surrounding how these kinds of financial gifts (and the penalties for exceeding the annual limits) actually work.
In my experience, one of the most common financial misconceptions has to do with how much you have give away each year without incurring a tax penalty. In 2012, the annual gift limit was $13,000. As part of the agreement that was reached to settle the fiscal cliff debate, the new annual gift limit is now $14,000. Specifically, I speak with clients all the time who are under the impression that the annual gift limit represents a hard-and-fast rule whereby any amount of a financial gift over that limit is subject to taxation. The reality is that you can give away virtually any amount you like, you simply have to report it to the government.
The only tax “penalty” that you incur for doing so has to do with your lifetime basic exclusion amount, a number that is the same as the estate tax exemption ($5.25 million in 2013). So you can see that the instances where this would be a significant problem are rare. Looking at the math shows how even a very large financial gift of, say, $100,000, would only take that lifetime exclusion down to $5,164,000 (the number you get from taking the $86,000 that is over the $14,000 annual limit and subtracting it from $5.25 million). People tend to spend a lot of time worrying about these numbers, but the reality is that unless you routinely give extremely large amounts of money, there is very little reason to think that this will be an issue for you.