Gift Tax Exclusion
Estate tax is a total different kind of animal as opposed to the income tax. It is a tax on wealth transfer, so the tax is calculated on your total wealth. In 2009, if your total wealth is higher than $3.5 million, you will pay 45% tax on the excess over this the $3.5 exemption.
Estate tax laws are very dynamic and changing all the time because of the political and lobbyist influences. Before 2009, the exemption used to be $1, $1.5, and $2 million. We are heading to a lower exemption amount again (possible $1 million) and a higher tax rate (possible 55%) with the current congress.
Your total wealth should include the market value of your house, real estate investments, worth of your business, life insurance (if you are the owner), on top of more liquid assets such as stocks and bank accounts. Living in places such as San Francisco bay area, the exemption amount can be easily used up because of the high real estate value.
So it is wise to think about controlling your total assets over your lifetime. Annual gifting is one of such techniques. You can give $13,000 in 2009 to anybody without any tax to both you and the person getting your gift. This is the annual gift exclusion, and the amount will be adjusted upward every year.
Ok, I know what you are thinking – that is not much. Well here is the good part. If you are married and filing join return, you can give out $26,000 to a person without tax.
Still not good enough? Ok, you can gift to unlimited number of peoples. For example, if you have two married children. You can give 4 of them each $26,000, a total of $104,000. Now I am sure you would appreciate the magnitude of such technique.
If you have younger children or grant children, you can set up a college saving plan, the 529 plan for each of them. You can contribute $13,000 (or whatever the current gift exclusion amount is) to each of this account. Better yet, you can put a lump-sum contribution into this account up to 5 year’s exclusion amount ($13,000 x 5), and it is still a tax free gift. Of course, for those married filing jointly, you can now figure out the contribution should be doubled.
These examples show you the power of annual gift exclusion. If you plan this early, it gives you a good way to control the size of your wealth and at the same time transfer your assets to next generation with no direct tax impact.
I am trying to understand this exclusion. My mother passed away and all her assets were bank accounts where I am joint owner. Her will divides assets equally among all children. My lawyer says it is all mine to do with whatever I want. I want to distribute the money but it is much more than the $13000 allowed. How can I do this? Can I just give it to them or should I try to do it over seveal years? If I give them it all do I fill out a gift tax form and hope the IRS doesn’t come after me?
Roberta – Gift exclusion is used to reduce the total estate (assets). Gift tax return (Form 709) is required only during her life-time. These are estate planning techniques before a person passes away.
When your mother passed away, the value of her total assets was fixed. Such estate, including money in banks, value of her house, and other investments, will be subject to estate tax (Form 706). For 2009, if her total estate is less than $3.5 million, the estate tax due should be none.
Obviously, you are her estate administrator according to her Will, your job is to distribute the money to all her children according the detail of her Will. In general, there will be no tax impact on all of you who are inheriting. You do not even need to report that, because, in theory, Uncle Sam already gets the share from estate tax return.