This year a gift of as much as $13,000 is excluded from federal gift tax. Next year, thanks to an inflation adjustment, the annual exclusion rises to $14,000.
Larger gifts require the donor to file a federal gift tax return. Always happens, right?
Not exactly. Uncle Patrick just gave his favorite niece a $18,000 Elantra to drive off to college. Do you expect him to file a return and reduce his Unified Tax Credit by $5,000? (Oct. 3 Correction: Patrick would reduce what amounts to his transfer-tax exemption by $5,000. The UTC itself would shrink by a smaller amount.)
What about that $15,000 watch Aunt Mame just bought for her favorite nephew? Expect her to knock $2,000 off her lifetime exemption from gift tax?
Donors careless enough to die soon after gift-making may get snared in a tax audit. Otherwise, the exclusion seems based mostly on the honor system. Cheating, mostly unintentional, would be even more widespread were not payments of another person's tuition or medical expenses deemed nongifts.
Out of curiosity, your blogger checked out the annual gift exclusion of eighty years ago. It was $5,000. That was a lot of money in 1932 – over $82,000 in current dollars.
Shouldn't Uncle Patrick be able to buy his niece a Porsche without gift tax worries?