Learn About the Annual Gift Tax Exclusion

Estate Planning

Updated July 01, 2017

The Internal Revenue Code imposes a gift tax on property or cash you give to any one person, but only if the value of the gift exceeds a certain threshold called the annual gift tax exclusion. You can give away the amount of the exclusion each year without incurring a tax -- and yes, you are responsible for paying it when and if it comes due, not the recipient of the gift.

The Annual Gift Tax Exclusion

The annual gift tax exclusion was indexed for inflation as part of the Tax Relief Act of 1997, so the amount increased in subsequent years to keep pace with the economy.

Below is a chart that shows the increases in the annual exclusion from 1997 through 2015. The exclusion has remained steady for several spans of years, increasing in 2002, 2006, 2009 and 2013. It can only increase in increments of $1,000.

Historical Annual Gift Tax Exclusion Amounts

Year	Annual Exclusion Amount
1997	$10,000
1998	$10,000
1999	$10,000
2000	$10,000
2001	$10,000
2002	$11,000
2003	$11,000
2004	$11,000
2005	$11,000
2006	$12,000
2007	$12,000
2008	$12,000
2009	$13,000
2010	$13,000
2011	$13,000
2012	$13,000
2013	$14,000
2014	$14,000
2015	$14,000

The exclusion remains at $14,000 in 2016 and doubles to $28,000 if you're married -- you can give away $14,000 and your spouse can do the same.

What It All Means

Don't confuse the annual gift tax exclusion with the lifetime gift tax exemption, which is entirely different and much more complex. See: What's the Difference Between the Annual Gift Tax Exclusion and the Lifetime Gift Tax Exemption?

Here's how the annual gift tax exclusion works. You can give anyone up to $14,000 in 2016 without paying a gift tax. Because this is an annual exclusion, you could gift $14,000 on Dec. 31 and another $14,000 on Jan. 1 without breaking the rules or incurring a tax. If you gave $15,000 on Dec. 31, you would owe a gift tax on $1,000, the value above the exclusion amount at a potential top tax rate of up to 40 percent.

The gift does not have to be made in one lump sum. The tax also comes due if you cumulatively exceed the exclusion amount, so if give someone $2,000 a month for 12 months, you'll owe the gift tax on the balance of $10,000.

The IRS defines a gift as anything for which you don't receive full consideration in return. If you sell a piece of property to your niece for $100,000, but the property appraised at a fair market value of $200,000, you've given a gift of $100,000. Fair market value is defined as what someone would reasonably pay for an item in a reasonable exchange when neither he nor the seller were under pressure to pay too much or sell for too little. Of course, cash is a dollar-for-dollar value against the exclusion.

These rules don't apply to everything and everyone. You can make unlimited gifts in the form of tuition and other qualified educational expenses and medical expenses if you pay the learning institution or the care provider directly. If you pay schooling or doctor bills on someone's it's not a gift and does not count against the exclusion amount. You can make unlimited gifts to political organizations and to your spouse, provided your spouse is a U.S. citizen.