Taxes

The Gift Tax: Use It or Lose It

Make people happy while you're still around to hear "thank you"...

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.

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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