KIPLINGER TAX CENTER
TRUSTED ADVICE TO HELP YOU LOWER YOUR 2007 TAX BILL
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Gift taxes are paid by the grantor, not the recipient, and only after the grantor dies. But taxes are seldom owed, even on substantial gifts, because the tax is offset by a credit that exempts up to $1 million of taxable gifts over your lifetime.
Still, you must keep track of your largesse and file a gift tax return form 709 for any gift to an individual that exceeds this year's taxable gift exclusion of $12,000 per recipient. You and your spouse can jointly gift up to $24,000 per person and amounts paid directly to an institution for tuition or medical expenses are exempt from gift tax rules.
You don't get an income tax deduction for such gifts, but there's an important advantage: Assets given away during your life -- and any future appreciation -- won't be in your estate to be taxed after you die. It's particularly important to pay attention to gift tax rules now. Last year, the Republican-controlled Congress tried unsuccessfully several times to permanently repeal the estate tax. With the Democrats in charge of the Congress, a permanent repeal of the estate tax is unlikely.
Why worry about the gift exclusion as an end-of-year maneuver? If you don't use your $12,000 annual exclusion by December 31, you lose it. Each new year presents you with a new exclusion, but you can't reach back to benefit from a previous year's unused allowance.
Assume, for example, that a couple plans to give $48,000 to their son. If they give it all during one year, $24,000 of the gift would be sheltered from the gift tax. The other $24,000 wouldn't be. However, if half the gift was given in December and the other half in January, the full $48,000 would be protected. If you make a gift by check, be sure the recipient cashes it before the end of the year because when it comes to gifts, the IRS considers it given in the year the check is cashed.
Another option is to fund a 529 state-sponsored college savings plan for your child or grandchild. You can contribute up to five years' worth of gifts at once, meaning you could contribute up to $60,000 per child or up to $120,000 if you and your spouse make a joint contribution. Contributions to 529 plans are not deductible from federal income taxes, but some states offer tax deductions on state income taxes.
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