Often Misunderstood - The Gift Tax | Tax Tip of the Week | No. 50

Background: One of the biggest reasons that the federal gift tax law exists is to keep taxpayers from avoiding federal estate tax by giving away their money or assets during their lifetime.The gift tax is often misunderstood since it is not the recipient that owes the tax but the giver.Generally speaking, one may be responsible for paying federal gift tax if you give away a lot of money or other assets.  Under current federal tax law, up to $13,000 annually may be gifted to any number of individuals without incurring a federal gift tax liability.  There is also a one million dollar lifetime limit on gifts.  Any gifts exceeding these amounts will most likely require the filing of an IRS Form 709. Planning opportunities exists to minimize the potential gift taxIf properly executed, gifting may be a very effective estate planning tool.  Any large gifts need pre- planning so that neither the giver nor recipient owes a gift tax.Some other considerations when making large gifts of money or assets follow:

1. You and your spouse can gift annually up to $26,000 to any number of persons.
2. The gift is money or assets given away without any expected return.
3. Giving away money or assets while you are still alive may provide large tax savings to your beneficiaries.
4. Paying someone else’s medical expenses is exempt from these rules.  However, you must pay them directly to the medical institution to qualify.
5. Gifts of educational expenses are also exempt.  These include payments directly made for education, books, supplies, and other related living expenses.
6. Charitable gifts and gifts to your spouse are also not subject to the gift tax.

Note:  As it currently stands for 2010, the federal estate tax was repealed for one year only (don’t confuse that with the Ohio Estate Tax – it is still very much alive and well).  However, beginning next year, all estate and gift rates will revert back to their 2001 levels.  So in 2011, each estate can exclude only $1 million of their estate tax-free to their beneficiaries.  Any estate value above that is subject to federal estate tax.  Please be watchful for any new legislation as Congress continues to debate these issues.

Anything you'd like to add?

We know many of the topics covered in TTW can get complicated quickly. The gift tax is a great example. Let us know what has worked for you or if you need clarification.As always, you can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our web site.Mark Bradstreet – author of this week’s TTWRick Prewitt - the guy behind TTW...until next week.