Let’s talk about Gift Tax. I’ve received a number of calls this summer asking about how much they can give to a child or friend before tax will be paid on the gift. So here are some basic things to remember when you gift but since I won’t be covering all the exceptions do check with your tax pro about your specific situation. Also, the current rules for gifting are tied with the Estate Tax which Congress has said they will work on if when they get back to work after the election. If they do nothing, the current estate/gift rates will expire at the end of the year and revert to lower levels.
One thing that probably won’t change is that the gift tax and estate tax are tied together. For 2012, they have a combined exclusion from tax of $5,120,000. Yes, that is over $5 million. When you give a taxable gift, that amount is subtracted from the exclusion amount. No tax is due until you have gone over the exclusion. So if Joe gives $1 million to each of his 2 children in 2012, he has $3.1 million of his exclusion left. If he should then die in 2012, the $3.1 million exclusion will reduce the amount of his estate subject to tax. If he still has a $5 million estate at his death, the exclusion ($3.1 million) will be subtracted from the total value and leave the estate with $1.9 million that could be subject to tax.
The official definition of a gift is that it can be real or personal property that is tangible or intangible. Practically, that means cash, stock, collectables, land, buildings… pretty much anything. To be subject to the gift tax rules, the gift must be complete. The giver must give up any claim to the gift. Until the recipient has complete control over the gift, it’s not a gift.
There are a few transfers that are not considered to be gifts. Transfers between spouses are not gifts and don’t have to be considered when preparing a gift tax return. Also gifts to pay tuition and medical expenses can be considered no gifts as long as they are paid directly to the school or medical organization. If they are given to the individual to reimburse or pay the expenses themselves, the payments are gifts.
Now to the nuts and bolts. An individual may (for 2012) give another person a gift valued, at the time of the gift, at up to $13,000 tax free. Only what they give over $13,000 is subject to gift tax. A return has to be filed but they may not be any actual tax depending on how much has been excluded before. Now that is for one giver and for each year. Jane can give each of her 6 kids $13,000 a year, every year (or that year’s maximum gift amount) and never have to pay gift tax. A married couple can each give $13,000 a year. So, Jane and John can give each of their 6 kids $13,000 (total of $26,000 each child) with no gift tax. But if Jane gives each child $16,000, she will have to file a Gift Tax Return (Form 709). There shouldn’t be any tax due but her total exclusion amount will be reduced by $3000 for each of the $16,000 gifts she made.
A gift is not reported on the recipient’s return nor do they pay the gift tax. The tax is the responsibility of the giver. It’s also their responsibility to keep track of prior gift returns and the remaining exclusion amount.
For most of us, we’ll never have to pay gift tax (or estate tax for that matter). And with a little planning we can avoid even having to file a Gift Tax Return. But the rules are a little complex and may be changing soon, so check with your tax pro before you make the gifts to insure you are following all the rules.