Annual gifting limit now $12,000
Effective January 1, 2006 you can make annual gifts of up to $12,000 each to as many people as you wish. The limit previously was $11,000. If you wish to give more than the limit, you will need to file a federal gift tax return and may need to pay gift taxes as well.
Let’s briefly review the IRS rules relating to gifts. Note that gifting and the estate tax are closely linked – the IRS does not want people to give away large chunks of property to avoid paying estate tax.
Exclusions
For IRS purposes, the following are not considered taxable gifts
- Up to $12,000 per donee per year (a married couple may double this);
- Gifts to a spouse
- Payment of someone’s medical or school expenses, if paid directly to the service provider or school
- Charitable donations and gifts to political organizations
What is a gift?
The IRS definition of a gift is somewhat broader thanyou may think. Obviously, if you give somebody cash or property without getting something in return, that’s a gift. Here are some other examples:
You sell something at below the market price. The value of the gift is the difference between what you received and the fair market value.
- You forgive a debt.
- You give somebody an interest-free (or below market rate) loan.
What if you exceed the exclusion amount?
Now you need to file a federal gift tax return (Form 709). Here is how it works: Suppose you gave your alma mater a $25,000 donation, your wife a $15,000 fur coat and your son a $50,000 Porsche for his high school graduation. The donation can be deducted on your 1040 income tax return but has no gift tax consequences. The fur coat has no tax implications at all because your wife is the recipient of your largesse. That leaves the car. After subtracting the $12,000 exclusion, you must report $38,000 on Form 709.
But, assuming you made no prior reportable gifts, you don’t owe any tax – yet. That’s because there is also a $1,000,000 lifetime exclusion, of which you have now used $38,000. In future years whenever you exceed the exclusion amount you will need to file Form 709 to report the accumulated amounts. Once the total exceeds $1,000,000 you will owe gift tax, which is quite hefty.
Estate tax connection
If you die before hitting the $1,000,000 lifetime exclusion you will never pay any gift tax. But that doesn’t necessarily mean you’ve gotten off scott-free. That’s because your reportable gifts also eat into your estate tax exclusion.
As always, it’s best to consult a knowledgeable professional advisor such as Mentor Capital for help with both a gifting strategy and reporting, since the impact of making a mistake in this area can be sizable.
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