Gift Tax Rules and Generous Dads

Dear Liza,  My aging dad desires to give me a cash gift ($200,000).  I have read the IRS info about him being able to give me $13,000 per year.  I also understand he could give my wife an additional $13,000 annually without either of us (giver or receiver of gift) having to report to IRS.  But what about a gift of $200,000, can he do that? Yes, he most certainly can. But I really understand your confusion. My clients get this mixed up often, too. Here’s the deal. You’ve got two gift giving concepts collapsed into one. First, you are absolutely correct that your Dad can give $13,000 to as many individuals as he choooses to, every single year, without reporting any of these gifts to the IRS. This is called the annual exclusion from the gift tax. But, if your father wants to give more than that in any year, he can do that, too. He’s also got a lifetime exclusion from the gift tax, and the amazing news is that this year (and next) this is equal to $5 million! To put it mildly, this should cover most of our gift giving ability, right? Your father can give you up to $5 million free of gift tax during his lifetime, or after his death, free of estate tax. He will need to report this gift on a gift tax return by April 15th of the year following the gift, but no tax will be due, provided he’s under that lifetime exclusion limit (which he is). Here’s another way to think about these two exclusions: the lifetime exclusion is sort of like a basketball clock, it gradually runs down as gifts are made during a donor’s life and reported to the IRS;  the annual exclusion is a gift that doesn’t even begin to run down that clock–you can make annual exclusion gifts every year without touching the lifetime exclusion.