Understanding Gift Taxation

There are many reasons to make gifts during your lifetime. There are personal and tax reasons for making lifetime gifts. Despite all of the fancy estate planning tools available, gift giving is one of the simplest and most effective ways to reduce one’s estate tax liability. Moreover, many people enjoy giving gifts during their lifetime. Despite the prevalence, many people do not understand the gift tax system.

The gift tax is a federal tax. The gift tax is paid by the person who makes the gift, not by the recipient. The receipt of a gift is not a taxable event for income tax purposes. To understand the federal gift tax system it is important to understand two key exclusions: Lifetime Applicable Exclusion and the Annual Exclusion.

The Lifetime Applicable Exclusion is an amount of money that may be given away tax free. An individual may give up to $1,000,000 in a lifetime without incurring any tax liability. If the Lifetime Applicable Exclusion is exceeded, the gift tax rate ranges between 41 percent to 46 percent.

For example, Fred has made $1,100,000 worth of gifts during his lifetime. Fred’s first $1,000,000 will be excluded from gift tax by the Lifetime Applicable Exclusion. The remaining $100,000 will be taxed at a rate of 41 percent. Fred would be subject to approximately $41,000 in gift tax. Fortunately, most people do not have to worry about exceeding the Lifetime Exclusion Amount.

The second key concept to the gift tax, and perhaps the more important concept, is the Annual Gift Tax Exclusion. The Annual Gift Tax Exclusion allows a person to make a $12,000 gift to an individual. As long as a gift to one person is equal to or less than $12,000 in one calendar year, no amount will be counted against the $1,000,000 lifetime exclusion. That is, a person can give $12,000 per year without any gift tax consequences at all.

There is no limit to the number of people that you may give $12,000 to without using up your Lifetime Applicable Exclusion. Married persons may give up to $24,000 to an individual in one calendar year. Additionally, a married person may make unlimited gifts to their spouse without incurring any gift tax liability. If a gift is less than $12,000 in a calendar year there is no need to file a gift tax return with the Internal Revenue Service. Consult your tax advisor if you want to make a gift larger than $12,000 to one person in a calendar year.

In another example: Fred has three children. Fred may give each child $12,000 per year without any gift tax liability or using any of the $1,000,000 Lifetime Applicable Exclusion. However, if Fred’s gift to each child increased to $15,000 in one calendar year, the amount of the gift in excess of the $12,000 ($3,000 for each child) would count against the Lifetime Applicable Exclusion. Fred would have used $9,000 of the Lifetime Applicable Exclusion and would be required to file a gift tax return with the Internal Revenue service. Therefore, it is generally wise, unless advised differently by your tax advisor, to limit your lifetime gifts to an amount less than $12,000 (or $24,000 for married couples) per year to any one individual.

Making a lifetime gift makes sense for many reasons both personal and fiscal. Understanding the basics of the federal gift tax system can make the process a little easier. If you are considering making a large gift be sure to consult your tax advisor. There is no substitute for individually tailored tax advice.

For further information please visit:http://www.mylaw101.com

Published by: legal on April 9th, 2008 | Filed under Uncategorized



Leave a Comment

rss feed