If you give someone money or property during your life, you may be subject to federal gift tax. However, the IRS recently announced that the gift tax annual exclusion will remain unchanged in 2010 at $13,000. As long as your gifts to an individual are $13,000 or less, there is no gift tax return that is required to be filed and no gift taxes are due.
Most gifts are not subject to the gift tax and most estates are not subject to the estate tax. For example, there is usually no tax if you make a gift to your spouse or to a charity while you are alive or if your estate goes to your spouse or to a charity at your death. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion of $13,000.
Even if tax applies to your gifts or your estate, it may be eliminated by the unified credit. Talk to your tax attorney about how to eliminate the gift and estate tax.
Gift tax returns are filed with the Internal Revenue Service when the value of your gift exceeds $13,000, unless you are making a gift to your spouse. Gifts to spouses are usually non-taxable.
A married couple can actually gift $26,000 to each individual without creating a gift tax liability; there is no need to report it to the Internal Revenue Service either.
With proper gift planning a family can transfer a significant amount of money to their children and grandchildren. For example, you and your spouse have 3 kids who are married and each kid has 2 of their own children. The number of people who can each receive a non-taxable gift is 12: 3 kids + 3 spouses + 6 grandchildren. A gift of $13,000 to each person by both you and your spouse can remove $312,000 a year from your estate. Do this for 10 years and you could remove over $3.1 million. Given that the current tax rate is 45%, this could save $1.4 million in estate taxes.
Generally, the person who receives your gift or your bequest will not have to pay any federal gift tax or estate tax because of it. Also, that person will not have to pay income tax on the value of the gift or inheritance received. Taxes on gifts or bequests are paid by the one making the gift or by the one who dies and leaves behind an estate.
Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).
For other estate planning ideas, talk to Mitchell A. Port at 310.559.5259 – a tax attorney in Los Angeles, California.