Tax Tips
The Gift Tax: Use It or Lose It
Make people happy while you're still around to hear "thank you"...
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
December 12, 2011
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Giving gifts to family and friends during your lifetime permanently removes money or other assets from your estate, reducing any future estate tax. Under current law, only the wealthiest Americans need to worry about the federal estate tax, but those limits expire at the end of 2012. So even taxpayers of more modest means may want to take full advantage of the annual gift-tax exclusion -- because once the year is over, your 2011 exclusion is gone forever.
SEE ALSO: 12 Year-End Tax Moves to Make Now
You can give up to $13,000 to as many people as you want in 2011 without filing a gift-tax return. And you and your spouse can give up to $26,000 to anyone you wish.
If you give a gift that exceeds the annual exclusion amount, you'll have to keep track of your largesse by filing a gift-tax return -- Form 709. Gift taxes are paid by the grantor, not the recipient.
There's a special exception for contributing to a 529 college savings plan: You can contribute up to $65,000 to a 529 college savings plan for your child, grandchildren or other recipient and spread the contribution over five years tax-free. But you must file a gift tax Form 709 to document the spread.
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 included in your estate to be taxed after you die.
But taxes are seldom owed, even on substantial gifts. Everyone gets a credit that exempts up to $5 million of taxable gifts over your lifetime ($10 million for married couples). The tiny fraction of estates that do trigger the tax are taxed at a flat rate of 35%.
However, the lifetime exemption drops to the previous limit of $1 million and the tax rate jumps to 55% in 2013 unless Congress comes up with a new deal. Another provision of the law -- the portability feature which allows the surviving member of a couple to claim any unused portion of the exemption -- is set to disappear in 2013 as well.
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Reader Comments (11)
Posted by: F. Hund at 11/30/2009 11:32:17 AM
I gave $60,000 to my grandson's 529 college savings account two years ago to cover five years permissible gifts. Since the amount eligible has now increased to $65,000 can I contribute the extra $5,000 (or more if allowed) per year for the next three years?
Posted by: james at 11/30/2009 11:48:06 AM
Mr Hund... you are a great grand dad by giving your grandchild that much $$. Hopefully he will reciprocate by turning in to someone you can respect.
Posted by: U028477 at 11/30/2009 11:56:59 AM
While the points made in this article are factually accurate, relating the gift tax to the estate tax would have given this article more context. Generally, a major (but obviously not exclusive) focus in lifetime gift giving strategies is the avoidance of estate tax following the death of the taxpayer. Annual exclusion gifts are excluded from a taxpayers taxable estate upon death and, thus, escape taxation, which at the current top marginal tax bracket of 38%, represents a significant increase in the net amount of property that can be passed down the generational ladder. However, since the current amount of property exempt from estate taxation for each taxpayer is $3.5 million ($7.0 million for a husband and wife), few taxpayer in America will ever have an estate large enough to be subject to estate taxation. Thus, for most taxpayers, the purpose of making lifetime gifts may have little to do with tax avoidance and everything to do with shifting assets down the generational ladder.
Posted by: Sean at 11/30/2009 12:59:28 PM
I would like to give a pice of appreciated property to my three kids (in equal shares). The property is worth $780,000. I am married and expect to remain remarried indefinitely. Can my wife & I give a combined $26,000 to each child (3 x $26,000) each year over the next ten years in order to convey the property gift tax free! How do the mechanics of the transfer work with a piece of property over such a long period?
Posted by: Mary Beth at 12/01/2009 10:30:13 AM
Hi Mary Beth Franklin here, author of this column. In response to Sean: Get your property appraised and then give fractional interest each year based on that valuation. You and your wife can gift up to $26,000 to each recipient each year based on the current $13,000 gift tax exclusion. Hope this helps.
Posted by: Mary Beth Franklin at 12/01/2009 01:26:51 PM
Hi, Mary Beth Franklin here, author of this column. In response to Mr. Hund: Your $60,000 gift to your grandsons 529 college savings account in 2007 was based on the $12,000 gift exclusion limit in effect at the time and the assumption was it would be allocated equally over five years. Now that the gift exclusion has been increased to $13,000, you can donate an extra $1,000 before the end of this year for 2009 plus another $1,000 a year in 2010 and 2011. But you cant lump these additional donations together. You must make them individually by December 31 of each year. (If the gift exclusion rises in 2011, you would be able to donate the increased amount as well.) Hope this helps.
Posted by: Charlie at 12/01/2009 04:47:25 PM
Re the question by Sean: What is the procedure for documenting the gift of real estate? Is it necessary to record a new deed every year to document the gift of the partial interest in the real estate? Preping and recording a new deed each year can be costly?
Posted by: Jack at 12/07/2009 10:19:14 AM
For those of us trying to help out family hit hard during these difficult times, this was a timely and interesting article on the $13,000 gift tax exclusion. For the recipients of the gift, however, what are the tax responsibilities? Do they have to declare the gift as income and pay federal income tax on the $13,000? For those on Medicare D "Extra Help", would this count against the income and resource limits for qualification? What about effects on the Medicaid qualification limits?
Posted by: Larry at 12/15/2009 10:04:41 AM
My 25 year old non-dependent daughter is getting married in February. I plan to give her $25,000 towards her wedding expenses. Is this considered a gift, of which the excess over $13,000 (I'm single) would be subject to gift tax? This appears to me more like a parenting obligation/expense. Also, would she have to claim any excess over the $13,000 on her tax return, which would be subject to gift tax?
Posted by: Danielle at 04/15/2010 09:54:01 AM
What if my b.f. and I bought a home together, i have paid for half of EVERYTHING including the down payment but my credit was poor so he's the only one on the loan papers. We want to add me to the title, but this is being listed as a gift so will this trigger a gift tax to him if we continue and do this if our home was appraised at $240K in Oct 2009?
Posted by: Marolyn C. at 05/03/2010 01:35:01 PM
My husband died on Feb.25, 2010. Can he posthumously give the $13000 gift limit to his children?