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How to Understand the Gift Tax

Updated on August 1, 2012

How Much Can I Give ???

One of the more confusing taxes to grasp for the average American is that of the gift tax. Despite what many people think, although you can give an unlimited amount of assets to a charitable organization, you are effectively limited to that in which you can gift to your own family and friends. A gift in the eyes of the IRS is considered to be any transfer either directly or indirectly where full consideration is not received in return.

When giving assets to someone other than a charity you have an annual exemption in the year 2012 of $13,000.00 per individual, but not in the aggregate. There effectively is no limit in the aggregate as long as each gift is no more than the $13,000.00. This limit is a per tax year limit, so a $13,000.00 gift in December would not preclude you from giving another gift in January. Should you actually exceed the $13,000.00 in a calendar year, the amount of excess would require that you file IRS form 709 for a gift tax return. This does not however necessarily require that you actually pay a gift tax. Each individual has a lifetime exemption in the aggregate of $5,120,000.00. This is currently a part of the tax law that is set to expire at the end of 2012 and be reduced to a lifetime aggregate of $1,000,000.00. This pending change has increased gifting activity among the high net worth before the exemption is potentially reduced in coming years.

This tax on transfers is essentially determined by what is called a unified credit. The unified credit is the amount that either reduces or eliminated the tax owed. In the year 2012 the unified credit for both gift tax and estate tax purposes is $1,772,800.00. This essentially exempts a total of $5,120,000.00

Additionally transfers in excess of $5,000,000.00 may also be subject to Generational Skipping Tax if the individual whom the assets are transferred to are more than 37.5 years or more than one generation younger than the donor.

Many of these numbers may sound like quite a bit of money. And in reality it is a sizeable amount in the way of assets when compared to the average American. However in many cases the value of an estate’s assets that might be gifted can be misleading. Perhaps an individual has a family business in which the assets that make up the business may be real estate that is vital to the operation of the business. Yet the business may produce profits of a substantially smaller dollar value. In such cases if the assets or at least a portion thereof are not properly transferred prior to death the family members could be forced to sell the family business just to pay the taxes due on the estates value. In other cases a family may have a home of sizeable value while simultaneously having a relatively limited liquid net worth. In such cases this presents an opportunity to re-title through gifting the title of the home. This can also serve to protect an individual’s assets within their estate that they would prefer to leave to their families in areas of health care planning by removing an asset from the taxable estate should they need a form of long term care assistance.

The most important thing in the process of evaluating the impact of the gift tax is to essentially maximize the amount allowable for gift tax purposes without impairing your ability to generate income for yourself in retirement. As a result, real estate such as your primary residence which typically does not provide an income is often one of the more common assets to be gifted into an irrevocable trust or outright to a family member.

What happens if you exceed the limit of the lifetime aggregate ??? That is when the actual gift tax would apply. The tax rates that apply are similar to those under the estate tax. For the year 2012, any amount in excess of the aggregate will be taxed at 35%. In 2013 any amount in excess of the $1,000,000.00 aggregate will be taxed at 55%

For more information on the IRS gift and estate tax rates view the IRS publication 950.

The topic of estate planning in general is a complex one. There can be a number of twists and turns in an individual’s personal estate plan. It’s always prudent to seek the counsel of an attorney with an expertise in this field while working in concert with you financial planner and tax advisor.


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