Many people do not realize that gifts can be subject to tax – the federal gift tax – which levies a tax on the donor (not the recipient) based upon the fair value of the property which is given. There are exclusions and credits available to eliminate or offset the gift tax, however.
The most common exclusion from the federal gift tax allows a donor to give as much as $10,000 worth of property to each of any number of donees during the taxable year. A donor having five children can give a total of $50,000 to them annually ($10,000 each) without worrying about the gift tax. A husband and wife can double that amount to $20,000 per donee per year. Because of the unlimited marital deduction, a person can transfer an unlimited amount of property to his or her spouse tax free.
But suppose I give my only child $50,000 in a single year; is this gift subject to tax and must a gift tax return be filed? Yes, to both questions. However, current payment of the tax can be avoided by using a portion of the donor’s lifetime “exemption equivalent credit”. Historically, federal estate and gift taxes have been linked, largely because you reduce the size of your estate (and thus, your potential federal estate tax) by giving pieces of it away during life. Each taxpayer presently has a $192,800 credit against the estate tax, which allows $600,000 worth of property to pass free of estate taxes after death. This credit can be used during life to offset gift taxes that might otherwise be due.
In addition to the $10,000 annual exclusion, there is an unlimited gift tax exclusion for payment by the donor of medical expenses and/or tuition costs of the donee. These payments must be made directly to the provider of medical services or to the donee’s educational institution in order to qualify for the exclusion; payments to the donee don’t qualify.
There is talk that Congress and the President may get together on an amendment which would increase the $600,000 “safe harbor” significantly, possibly as high as $1,000,000. Such an increase would provide added flexibility in making lifetime gifts in connection with planning one’s estate. There may be other significant changes in the Internal Revenue Code affecting gifts, but it is impossible to speculate this early in the Congressional session.
As an estate planning device, the $10,000 per year exclusion is hard to beat. Over a period of ten or more years, it allows a married couple to transfer hundreds of thousands of dollars to children or other donees, thereby making a sizeable reduction in the size of their estate, with this amount escaping the estate tax all together. Individuals with sizeable estates and who are otherwise inclined to give should consider establishing a program of annual gifts to take advantage of this exclusion. We recommend that all such gifts be documented properly in writing and that accurate records be kept reflecting the date of the gift, the value of the property transferred, and the identity of the donee. A gift tax return may be required if a gift by one person exceeds $10,000 or if any of the exemption equivalent credit is used. If value is a question, an appraisal is in order.
The most common exclusion from the federal gift tax allows a donor to give as much as $10,000 worth of property to each of any number of donees during the taxable year. A donor having five children can give a total of $50,000 to them annually ($10,000 each) without worrying about the gift tax. A husband and wife can double that amount to $20,000 per donee per year. Because of the unlimited marital deduction, a person can transfer an unlimited amount of property to his or her spouse tax free.
But suppose I give my only child $50,000 in a single year; is this gift subject to tax and must a gift tax return be filed? Yes, to both questions. However, current payment of the tax can be avoided by using a portion of the donor’s lifetime “exemption equivalent credit”. Historically, federal estate and gift taxes have been linked, largely because you reduce the size of your estate (and thus, your potential federal estate tax) by giving pieces of it away during life. Each taxpayer presently has a $192,800 credit against the estate tax, which allows $600,000 worth of property to pass free of estate taxes after death. This credit can be used during life to offset gift taxes that might otherwise be due.
In addition to the $10,000 annual exclusion, there is an unlimited gift tax exclusion for payment by the donor of medical expenses and/or tuition costs of the donee. These payments must be made directly to the provider of medical services or to the donee’s educational institution in order to qualify for the exclusion; payments to the donee don’t qualify.
There is talk that Congress and the President may get together on an amendment which would increase the $600,000 “safe harbor” significantly, possibly as high as $1,000,000. Such an increase would provide added flexibility in making lifetime gifts in connection with planning one’s estate. There may be other significant changes in the Internal Revenue Code affecting gifts, but it is impossible to speculate this early in the Congressional session.
As an estate planning device, the $10,000 per year exclusion is hard to beat. Over a period of ten or more years, it allows a married couple to transfer hundreds of thousands of dollars to children or other donees, thereby making a sizeable reduction in the size of their estate, with this amount escaping the estate tax all together. Individuals with sizeable estates and who are otherwise inclined to give should consider establishing a program of annual gifts to take advantage of this exclusion. We recommend that all such gifts be documented properly in writing and that accurate records be kept reflecting the date of the gift, the value of the property transferred, and the identity of the donee. A gift tax return may be required if a gift by one person exceeds $10,000 or if any of the exemption equivalent credit is used. If value is a question, an appraisal is in order.
-Ken Butera