Will your gifts be subject to the Gift Tax?
Gift taxes are part of the federal system of transfer taxes. In establishing laws that taxes wealth when it transfers from one person to another, Congress was reflecting a bias against inherited wealth that probably dates back to anti-royalty thinking of the American Revolution.
A gift occurs when someone freely and voluntarily transfers property from themselves to another for less than market value. In estate planning terms we typically talk about lifetime gifts to heirs. There can often be tax advantages in making gifts to children or other heirs during your lifetime.
No Impact on Income Taxes
A gift has no impact with regard to income taxes. A gift is not taxable income. Recipients of gifts received them income tax-free. Likewise, gifts are not deducted from the donor’s income taxes. Sometimes my clients are confused when they hear that they can make gifts to their children “tax-free”. The reference is to the Annual Exclusion from gift tax.
Gift Tax Exclusion
The law provides an annual exclusion from gift taxes. This is the amount a donor can give to a beneficiary each year with no tax. In 2011 the gift tax exclusion is $13,000 per recipient. The annual exclusion is indexed to inflation and goes up from time to time.
One can also increase the tax-free nature of the gift by bundling to multiple recipients.
Do I Have To File A Gift Tax Return?
In 2011 the annual exclusion amount for gift taxes is $13,000. A married couple can now make split gifts of up to $26,000 without incurring any gift tax liability.
In considering filing tax returns most people don't think of filing Form 709, the Federal Gift Tax Return. But the filing of that return is required in instances when you and your spouse make a split gift greater than the annual exclusion amount of $13,000.
There is no tax, but the return is necessary for you to declare the split gift.
Always discuss significant gifts with your income tax professional.
Gifts in Excess of the Annual Exclusion Amount
If the gift exceeds the total amount of the annual exclusion in a single year, you’ll need to file a return. However, no tax may be due.
Gift Tax Rate
If you manage to exceed your $1,000,000 lifetime exemption, your gifts can be taxed at a maximum rate of 35%. This gift tax rate is set to remain unchanged though 2012.
Impact of a Gift on Capital Gains Basis
When you make the gift of property other than cash you are also making a gift of its current status for capital gains purposes. The recipient needs to know the donor’s cost basis and how long he has held the property. This can be a very significant issue when one makes large gifts such as real estate.Return from the Gift Tax article to the Home page by clicking here.
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