Gift tax hits the person giving the gift, not the recipient. At the time of writing, giving more than $14,000 to one person in a single year, whether in a lump sum or several smaller gifts, triggers the tax. It doesn't matter whether the gift takes the form of cash or property. Some gifts, such as paying for tuition or medical bills, are exempt. Gifts to your spouse are always exempt. If your gift isn't exempt, the tax can still be avoidable.
For married couples, gift splitting is a simple strategy to dodge the tax. Say you want to give $25,000 to your brother. Simply file a gift tax return -- Form 709 -- saying that half the gift is from your spouse. Even if all the money came from your account, the Internal Revenue Service will treat it as two separate $12,500 payments. That's low enough so that neither of you pays gift tax. Same-sex marriages also can use this benefit, but not people in civil unions or domestic partnerships.
Gift Tax Exclusion
Every taxpayer is entitled to exclude a total $5.43 million in gifts, at the time of writing, from tax over her lifetime. If you give, say, $50,000 in stock to your daughter this year, $36,000 of that is taxable. The solution is to file a gift tax return claiming $36,000 of your lifetime exclusion. The exclusion also protects your estate from estate tax after your death. If you're wealthy enough to exclude $2 million of gifts while you're alive, for example, and leave a $4 million estate, only $570,000 of your estate would be taxable.
Strategies that reduce the market value of your gift are more complex, but they can be effective. For example, if you give someone a $60,000 interest in an investment property but without the freedom to sell or control the property, the market value of the gift may be significantly less than $60,000. A federal tax court ruled in one case that the giver can lower the market value of the gift to reflect the recipient assuming some of the related tax liability.
Planning Your Strategy
If you don't anticipate having $5 million to give away, applying the gift-tax exclusion may be all you need to beat the tax man. If you want to try a discounting strategy, it's usually wiser to work with tax attorneys and accountants than to fly solo. If the IRS thinks you've discounted the value too much, it will probably challenge the valuation in court. Getting the biggest discount possible will take skilled help.
- Internal Revenue Service: Frequently Asked Questions on Gift Taxes
- Internal Revenue Service: Eight Tips From the IRS to Help You Determine if Your Gift Is Taxable
- Internal Revenue Service: What's New -- Estate and Gift Tax
- MarketWatch: How to Avoid the IRS Gift Tax Trap
- Journal of Accountancy: Tax Court Allows Discount of Gift Value for Assumption of Taxes
- Wall Street Journal: IRS Loses a Gift Tax Battle
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