Gift Tax Basics

The federal government imposes a substantial tax on gifts of money or property above certain levels. Without such a tax, someone with a sizable estate could give away a large portion of their property before death and escape estate taxes altogether. For this reason, the gift tax acts more or less as a backstop to the estate tax. Yet few people actually pay a gift tax during their lifetime. A gift program can substantially reduce overall transfer taxes; however, it requires good planning and a commitment to proceed with the gifts.

Advantages of Gift Giving

You may have many reasons for making gifts - some people have personal motives, others are motivated by tax considerations. Many want their gift-giving program to meet both personal and tax-planning objectives. Reasons for considering a gift-giving plan include:

• Assisting someone in immediate financial need

• Providing financial security for the recipient

• Giving the recipient experience in handling money

• Seeing the recipient enjoy the gift

• Taking advantage of the annual exclusion

• Paying a gift tax now to reduce overall taxes

• Giving tax-advantaged gifts to minors

Gift Tax Annual Exclusion

Perhaps the easiest way to reduce the size of your taxable estate is to make regular use of the gift tax annual exclusion. You may give up to $12,000 each year to as many persons as you want without incurring any gift tax. (Congress has now indexed this gift level to inflation; however, the figure will rise only in increments of $1,000.) If your spouse joins in making the gift (by consenting on a gift tax return), you may (as a couple) give $24,000 to each person annually without any gift tax liability.

Unlimited Gift Tax Exclusion

In addition to the $12,000 exclusion, there is an unlimited gift tax exclusion available to pay someone's medical or educational expenses. The beneficiary does not have to be your dependent or even related to you, although payment of a grandchild's expenses is a common use of the exclusion. You must make the payment directly to the institution providing the service -- the beneficiary himself or herself must not receive the payment.

Gift Programs and Your Estate

Use of the gift tax exclusion in a single year may not affect your estate tax situation significantly, but you can reduce your taxable estate substantially through a planned annual program of $12,000 gifts ($24,000 if you are married). All gifts within the exclusion limits are protected from federal estate taxes.

In addition to reducing the size of your estate, another major tax advantage of making a gift is the removal of future appreciation in the property's value from your estate. Suppose that you give stocks worth $50,000 to your children now. If you die in 10 years and the stock is worth $130,000, your estate will escape tax on the $80,000 appreciation even though you pay a gift tax on your next tax return.

To learn more about gifting strategies and how they can play a role in your tax and estate planning, contact us to schedule a consultation. We'll be happy to help.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.

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