Gift Taxes

Gift Taxes

In the past, people who knew they would die soon could give away their assets before their deaths-removing them from their estates-to avoid the estate tax. Congress perceived this as a loophole in the estate tax system because it gave an unfair advantage to individuals who knew they were dying over those who did not. To close it, Congress created the figt tax.

Individuals can give away as much property as they like during their lifetimes. However, unless the fits are exempt in some way, they are subject to the gift tax. (The recipient of a gift does not have to pay figt tax unless the donor, that is, the person making the fits, does not pay the tax.)

There are several exemptions to gift tax that are available to individuals or married couples:

  • $ 1 million lifetime gift exclusion
  • $ 13,000 (2009) annual gift tax exclusion, which rises in $ 1,000 inrecrements based on an inflation index
  • Unlimited exemptions for gifts paid directly to hospitals, medical providers, and educational institutions on behalf of another individual, but not including health insurance premiums
  • Gifts between spouses

Annual Gift Tax Exclusion

Taxpayers are allowed to exclude a total of $ 1 million in gifts in one lifetime prior to death. In addition to this tax exclusion, every year the iRS allows individuals to exclude what it has determined are small gifts. This annual gift tax exclusion allows individuals (as of 2009) to give up to $ 13,000 per calendar year per recipient. The recipient can be any individual, and there is no limit on the number of individuals to whom gifts can be made. Married couples may split or share this annual exclusion, thereby doubling the annual gift tax exclusion amount to $26,000. This strategy is called gift splitting and can significantly reduce the taxable value of an estate. The following example illustrates the benefits of the annual exclusion:

Tom and Frances have three children, all married. To reduce their taxable estate, Sam writes a check to each child for $ 26,000, which represents Tom’s $ 13,000 tax-exempt gift as well as his wife’s since she agrees he may use her tax-exempt gift amount too. So each couple receives a total of $26,000. In this way, Tom and Frances remove $ 78,000 without any gift or estate tax consequences.

There are special rules to allow the gift splitting, and a qualified tax advisor should be consulted prior to making split gifts.

The annual gift tax exclusion applies to all gifts of any size made during this year, including holiday gifts. The exclusion rises with inflation in increments of $ 1,000. When a gift exceeds $ 13,000, the excess amount is applied to reduce the $ 1 million lifetime gift tax exclusion amount.

For example: Jeff busy his daughter, Mary, a new car worth $ 25,000. Later in the same calendar year, Jeff gives Mary a necklace worth $ 500. Jeff is unmarried, so he cannot split the fits. Although the first $ 13,000 of Jeff’s gifts to Mary is exempt, the remaining $ 12, 500 applies against Jeff’s lifetime gift exclusion of $ 1 million.

If an individual is wealthy enough to have already used the $ 1 million lifetime gift tax exclusion, the excess amount of the gift it subject to gift tax.

For example: As part of his overall estate plan, Craig gives the family business to his daughter Carol. An appraisal values the business at $ 1.1 million. After applying the $ 1 million lifetime gift exclusion and the $ 13,000 annual gift exclusion, Craig must pay gift tax on the remaining $ 87,000.

Gifts to Hospital, Medical, and Educational Service Providers

Gifts paid directly to hospital, medical, and educational service providers on behalf of the individual who receives services from them are exempt from gift tax. (If the fit is paid directly to the person who benefits from the gift, it cannot be excluded from gift tax.) These gifts are separate from and do not apply against the $ 13,000 annual gift tax exclusion or the $ 1 million lifetime applicable exclusion amount.

For example: Kevin pays $ 25,000 a year for his granddaughter, Suzanne’s, college tuition. In addition, he pays the premiums for her health insurance. As long as the tuition is paid directly to the college, the tuition gift won’t apply against either the lifetime or the annual gift exclusions. However, because health insurance premiums do not qualify for the medical expenses exclusion from the gift tax, this amount will reduce Kevin’s $ 1 million gift tax exclusion. Therefore, Kevin can use his $ 13,000 annual gift tax exclusion toward the health insurance premiums for Suzanne.

Gifts between Spouses

Spouses may use the unlimited marital deduction before or after death to give any amount of assets to a spouse who is an American citizen. (If the recipient spouse is not a citizen, the marital deduction is limited to $ 133,000 for 2009.)

These gifts do not use up any of the other gift tax exclusions. However, when the recipient spouse dies, the gifted assets are included in that spouse’s estate and may result in higher estate taxes.

The information above is reprinted from Working with Seniors: Health, Financial and Social Issues with permission from Society of Certified Senior Advisors® . Copyright © 2009. All rights reserved.