Now that tax season is upon us, I want to clear up some confusion relating to gift taxes. I often hear people say that if you give away more than $14,000 (the annual exclusion amount in 2015) to any one individual during the tax year, you will have to pay a gift tax. This is not true. The federal government will only impose a gift tax if you give away more than the lifetime exemption amount, which in 2015 is $5.43 million.
However, if you give away more than $14,000 to any one individual this year, then you will have to file a gift tax return and report the amount you gave that was above $14,000. This amount will then be deducted from your lifetime exemption of $5.43 million. You will not owe any gift taxes until you have given away more than $5.43 million. If you do not give away more than $14,000 to an individual, then you will not have to file a gift tax return.
Moreover, another misconception is that the person receiving the gift has to pay income tax on it, but they do not, because gifts are not taxable. Happy gifting!