When it comes to estate planning, gift taxes and estate taxes often go hand in hand. But this year savvy estate planners have realized that the gift tax assumes an even greater role in estate planning than it usually does. Why? Because in 2010, the gift tax rate of 35 percent is at an all time low. In other words, now is the time to become more generous with your money and take advantage of the low gift tax rate before it rises to 55 percent on January 1, 2011.
What is the Gift Tax?
The IRS defines the gift tax as follows:
“The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.”
In other words, cash, property or use of property is generally considered a gift when one person gives it to another without any expectation of something in return.
What Isn't Considered a Gift?
The IRS considers nearly everything a gift; however, there are five exceptions:
- Gifts that are not more than the annual exclusion for the calendar year
- Tuition or medical expenses you pay for someone (the educational and medical exclusions)
- Gifts to your spouse
- Gifts to a political organization for its use
- Gifts to qualifying charities, which are deductible from the value of the gift(s) made
Who Pays the Tax?
Contrary to what you might think, the person giving the gift pays the tax, not the receiver. For example, let's say your grandmother gives you a check for $15,000 as a wedding present. While you might think that this counts as income that you and your new spouse will have to pay income taxes on, you would be mistaken. Recipients never have to pay gift tax. The tax, if one is owed, is paid by whoever gives you the gift—in this case, it would be your grandmother.
Is There an Annual or Lifetime Limit?
Beginning in the 2009 tax year, the annual limit per gift is $13,000 with a $1 million lifetime maximum. Any amount that exceeds the lifetime maximum is not only subject to the gift tax, but also is subject to the estate tax. Since this year, the estate tax happens to be 0 percent, gifts that exceed $1 million will only be taxed at 35 percent.
Can I Avoid Paying Gift Taxes?
As long as your gift is no more than $13,000 for tax year 2009 and you haven't exceeded the lifetime maximum of $1 million, you will not have to pay any gift tax. The IRS also states that if spouses own property together, they can each give $13,000 or a total of $26,000 to a third party without having to pay the gift tax. The IRS refers to this as gift splitting.
Giving gifts of property or cash to your loved ones while you are still alive not only helps them out financially, but it also helps you to reduce the tax you pay on your estate to the IRS when you die.