Gift giving is a part of human civilization. Rich or poor, we all gift each other in the form of cash or other items. However, it is important to know that all gifts including those to family members above certain value can have tax implications.This year you can gift up to $15,000 to a single individual without worrying about taxes. This limit is only for a calendar year. So next year, you could potentially gift to the same individual without incurring gift taxes. This amount of gift is called gift exclusion. The Internal Revenue Service (IRS) decides this amount on an annual basis. If you combine the gift with your spouse, you could gift up to twice the amount of gift exclusion....Show details

The reason for gift tax is very simple. Uncle Sam doesn't want you to part away from your property to avoid estate taxes ( or death tax) later on. As a result, gift and estate taxes are part of uniform gift and estate tax rules and are thus paid by the donor (person making gifts). If a gift is taxable that doesn't mean you have to pay the gift tax immediately. But you have to keep track of such gifts for estate tax purposes. Even for taxable gifts, Uncle Sam has set a lifetime taxable gift exclusion of $345,800. Once your taxable gifts exceed this exclusion amount, you can pay gift taxes that year or have it part of estate taxes....Show details

Last year, if your lifetime gifts added up to $345,800 and if your estate is worth $5,340,000, your estate will not have to pay any taxes. In 2001, as part of Economic Growth and Tax Relief Reconciliation Act that President Bush signed, estate and gift tax rates have gone down gradually with an eventual repeal of the estate tax in 2010. Beyond 2010, the estate taxes will reappear with lower exclusion and higher estate tax rates if Congress doesn't act on it. If someone dies in 2010, there are no estate taxes. Note that the repeal of estate taxes doesn't mean the repeal of gift taxes.

Any amount of property transfers from one spouse to the other are not taxable transactions. However, care should be taken to make sure that both spouses are able to claim their respective estate tax exemption, currently at $5,340,000. Unlike the unlimited gift to a spouse who is a U.S. citizen, the amount of gift to a non-citizen spouse is $2,000. This is to prevent a non-citizen spouse from taking the property out of the country to evade taxes.

If you gift to someone who skips a generation then in addition to gift taxes, you have to pay Generation Skipping Transfer Tax or GSTT. The rationale for this additional tax is that some rich people may pass on their property to their grandchildren directly and thereby reduce the number of times this property goes through estate taxes. For example let's take a scenario in which 2 rich individuals pass on their property to their great grandchildren. In one case, person A passes it to his/her children, then those children pass it to their children and they ultimately transfer it to their children. In this case, this property went through 3 taxable estates and could have estate tax liability each time. Let's say, the other rich individual passed on the property directly to his/her great grandchildren and had it go through estate taxes only once and potentially saving a lot in estate taxes. GSTT puts both these individuals on parity with respect to taxes....Show details

Note that the generation skipping rules are not limited to your direct descendants. They also apply to other relations such as brothers, sisters, cousins, nephews, nieces, etc. Additionally, in case of an unrelated (non-lineal) recipient (or donee), there are certain rules with respect to the age of the recipient. A person within 12.5 years of the age of donor is considered in the same generation. After first 12.5 years, every 25 years is considered a next generation. So, if you are gifting to someone not related and that person is younger to you by more than 37.5 years this gift is equivalent of giving it to a grandchild. So, it is subject to GSTT. However, if your gift is limited to $15,000 there is no consideration for GSTT.

Just like direct gift exclusion, there is an exemption on wealth transfer of $5,340,000 to those skipping the generation. In 2010, similar to estate taxes, there is no GSTT. But it will reappear in 2011 if Congress doesn't act upon it.

You should file IRS form 709 for gift tax return each your you have taxable gifts or you have chosen gift splitting. This return needs to be filed by April 15th of the year following the gift. This form is also used for reporting and calculating generation skipping transfer taxes (GSTT). Note that a gift tax return is required to be filed for gifts to a charity exceeding the annual exclusion of $15,000 even though you get a charitable deduction on your income tax and there is no gift tax payable on such donations. If your taxable gifts have not exceeded the lifetime exemption of $345,800, then this filing keeps track of your cumulative taxable gifts. If you have exceeded this exemption then it tells you how much in gift taxes you need to pay.

  • Keep a record of all the gifts above the gift exclusion limit. Also note that the gift exclusion applies to only present interest gifts (something that a donee (recipient) has the right to use today).
  • If you want to gift to grandchildren, you can gift up to $15,000 to each grandchild each year without worrying about gift taxes or generation skipping transfer taxes. If you are married at the time of gift, together with your spouse you can double this amount. People with significant estate could put together a gifting plan and save on taxes while benefiting those who need their help.
  • College saving plans (529 plans) have a 5-year rule allowing you to make a contribution equal to 5 times annual exclusion amount $15,000 in one year tax-free. If you split the gift with your spouse this amount can be doubled. However, the donor must elect this special treatment on a gift tax return filed after the gift is made and cannot make any other tax-free gifts in the 5-year period following the gift. If the donor dies within the 5-year period after such a gift is made, a pro rated portion of the gift must be added back into the donor's estate. Therefore, the completed gift is excluded from the donor's estate for estate tax purposes....Show details
  • Gifts to people related to work may have additional constraints imposed by employer policies or a regulatory body on your profession. A violation of such policies could have a serious impact on your career.
  • If you think your estate will be relatively small but your gifts could exceed lifetime exclusion then it may be worth having it as part of estate taxes so that it could benefit from gift and estate unified tax credit which currently stands at $145,000. But if your estate is going to be more than $345,800, and if estate taxes are going to be around then, it may be worth considering paying for gift taxes now.
  • Certain gifts can be made without the implications of gift taxes. They include tuition payments made directly to the educational institution or payment of health care expenses directly to the care provider.
  • If you have the capacity to gift, it may be worth giving it now than later as a bequest. A gift now may be more beneficial to the donee to meet his/her present needs. Besides, if a donee is not valuing your gift you can gift to someone else instead who values it more. Additionally if the gift is for a fast appreciating property, such as the stock of fast growing company, gifting it now takes it out of your estate now reducing the future estate tax liability.
  • People living in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington) have somewhat different rules on property ownership for married couples. In general, each spouse is deemed to own one-half of the community property acquired as a result of the efforts of either spouse during their marriage. So, gift splitting is automatic.
  • Gift and estate tax rules are generally complex. We strongly recommend consulting an estate attorney or a tax consultant before making a decision.
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