Gift Tax

UPDATE:  As part of the "Fiscal Cliff" deal, Congress voted on January 1, 2013 to reunify the estate and gift tax rules.  Now the gift tax law will also provide a $5 million, indexed for inflation (so $5.25 million in 2013) lifetime, per-person exemption ($10.5 million per married couple) and taxes amounts above that at 40%.  Also, the annual gift tax exclusion has increased to $14,000.

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When people complain about being taxed for nearly everything they do -- they make a good point. The "Gift Tax" is a good example. Believe it or not, even if you want to just give something away, you could be subject to taxation on the gift. The top federal gift tax rate is 35% in 2010. It could go to 55% in 2011.


The definition of a "gift" for tax purposes is transferring property to someone else without receiving full value in return. The property could be physical property, or money, or even giving someone a loan at an interest rate lower than the market rate.


The rationale for the gift tax is the same as for the estate tax; namely, that society does not want rich people to be able to pass their wealth on to future generations without Uncle Sam getting a piece of it. You may agree or disagree with the philosophy, but that's basically what it is.


So, in the case of a gift tax, if you want to give away something worth more than $13,000, then you need to think about the gift tax. Why 13K? Well, that's the current annual gift tax exclusion (still the case in 2011). So, you can give away as many gifts as you want and as long as the value of gifts to any one person does not exceed $13,000 in any one year -- then all of it will be exempt from any gift tax. This is completely separate from the lifetime gift tax exclusion.


If you are married, then your spouse also has an annual gift tax exclusion. So, you could each give $13,000 to your child and so he or she would receive up to $26,000 from the two of you without any gift tax issues. Grandparents could add to that, and so forth...


Now, if the value of any one individual's gift is over $13,000 in a particular year -- then you need to decide if you want to start using up your lifetime gift tax exclusion. The lifetime gift tax exclusion is $1,000,000. So, in addition to the annual exclusion, you can also exclude $1,000,000, during your lifetime, that you can give away without being subject to the gift tax.


Here some additional things you can give someone that might not be subject to the gift tax (gift tax exceptions):


  1. Gifts to your spouse;
  2. Tuition or medical expenses;
  3. Gifts to a political organization for its use; and,
  4. Gifts to qualifying charities.


If your estate has a value such that you have concerns about the estate tax, then you might well want to give away assets during your life, up to the amount of the gift tax exclusions, and thus get them out of your estate and avoid estate tax on them. This can be a very good estate planning strategy. And, if you are in that "predicament" then giving away assets that are likely to further appreciate makes sense.


In fact, since the gift tax rate is lower than the estate tax rate, it can even make sense to give stuff away even over and above the gift tax exclusions. But, definitely talk to an estate planning attorney before doing that.


See Gift Tax Exemption Apply To Medicaid


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