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What is an Annual Exclusion?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 November 2016
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An annual exclusion is a type of tax exemption that allows persons to gift other persons with assets up to $10,000.00 US Dollars (USD) without either party having to incur the requirement to pay the standard federal gift tax. There are some specific regulations that control whether or not any gift may properly be classified as an annual exclusion. Here is how the process of annual exclusion works.

An individual is allowed to provide an unlimited amount of exclusions to other people. However, the amount of gifts received by any one recipient cannot exceed the $10,000.00 USD figure. Also, the donor cannot have any type of control on how the recipient uses the gifts. They must be given freely, with no types of qualifications on how the gift is to be used by the recipient. Along with this no strings attached approach to the gift, the assets must quality as being of present interest. That is, the receiver of the gift must be able to make immediate use of the gift in whatever manner he or she sees fit.

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In order to maintain the status of an annual exclusion, donors must be able to confirm that the gift was extended of his or her own free will, and that there were no conditions attached to the receipt of the gift. This would rule out situations where an individual received a gift for a specified purpose, such as to pay for a college education, or as a down payment on property. If there is any evidence that the gift was presented with any type of conditions, then the exclusion cannot be granted.

The concept of the annual exclusion allows persons who wish to provide aid to other persons to do so without incurring gift taxes. Thus, an individual who wishes to gift a beloved friend or relative with an asset may do so. The annual exclusion applies if the gift were extended for no other reason than the donor wished to offer the gift as a token of their esteem for the recipient. The absence of a gift tax makes it very easy for people to choose to be generous with loved ones or other parties, if they choose to do so.

An annual exclusion must be claimed for the tax year in which the gift was presented. There is not the ability to go back and claim an annual exclusion after the fact. Accountants and financial advisors can counsel persons who wish to provide a gift to another person, and properly file documents that will help to classify the gift as an annual exclusion.

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