Annual IRS Gift Tax exemption limit and options

Factual Questions
1

As I understand it, in the US any person can gift up to $14,000 (in 2013) to any other person and not have to pay any gift taxes.

The $14k exemption is per person, so person A can give $14k to both B and $14k to C without any tax implications.

The recipient of any gifts never has any tax obligations, regardless of the amounts.

So if person A wanted to gift $28k to person B, couldn’t they just do the following:

A gives $14k to B
A gives $14k to C
C gives $14k to B

The net is A gives $28k to B and there are no taxes required.

Is this correct?

2

Superficially, it is correct.

However…

  1. A gift isn’t a gift if there are any conditions or requirements. So if a gift to C is conditioned on re-gifting to A, then it wasn’t a gift to C.
  2. Tax issues often come down to economic substance. If you give to C only as a way to double your gifts to A, then the economic substance is that you made 28,000 in gifts to A and you should be treated under tax law as if you had done that.

Don’t forget three other points:

  1. The 14k applies to each member of a married couple. So A-B (married) can give to C-D (married) a total of 4x14,000 per year.
  2. The 14k is an annual limit. So if you give someone 14k exactly at some point, then there’s a good chance that you’ll be over the limit after considering Christmas, birthdays, etc.
  3. Gifts over 14k must be reported. However, the gift-giver won’t pay any tax until after a total of $1 million of excess gifts over their lifetime. For most people, that means never.
3

Dracoi is correct that the 14k limit is for filing requirements and you do not actually pay tax until you go through your lifetime exemption amount of 1million (each dollar gifted, without gift splitting between married couples, above 14k would reduce your lifetime exemption amount). Another thing to keep in mind is the 1 million lifetime exemption for gifts also applies to the estate tax. The exemption applies to both. So for each dollar above the annual limit that you gift, you also reduce your estate tax exemption upon death.

Also conditions on a gift as Dracoi said do not get around the limits as the IRS will deem you to have made the gift to person C even if you use person B as a middle man.

4

OK thanks for the replies. Although I don’t see how the IRS would know that the transfer from A to B, then B to C was actually just A to C

Also, it looks like the lifetime exemption is now $5,250,000

5

Hmmm - does that include gifts (the Rolex, the diamond necklace) or just cash?

Do the IRS have to prove conditions on the gift, or can they just use behaviour patterns? “For the last 10 years, you did the following double-transfer via your sister to your uncle, so it must be just a tax dodge”? (“Hello fellow millionaire - if you give my son $14K, I’ll give your son $14K - just don’t tell the IRS about our deal…”)

6

Yes. From IRS Publication 950