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Recent changes in the gift tax law have been motivated by the long standing argument that gift and estate taxes are essentially double taxes; first the money is taxed as income, capital gains, or interest income and then it is taxed again when made into a gift. The new exceptions are high enough that most people will be able to give away all that they own without having to pay gift taxes at all, and as of 2010, the estate tax has been completely repealed.
There are several ways you can use the gift tax law to your advantage, and with the newest exclusion increases and a dramatic increase in the unified credit, you can manage and control the distribution of your wealth without waiting for your estate to be settled after your death. Since you, as the gift giver, are responsible for the payment of the gift tax, these exclusions and exceptions may be important to the preservation of your wealth and reduction of your tax burden.
Form 709
Regardless of whether or not you will end up being required to pay any gift tax or not, if you give gifts that exceed the basic exclusion amount ($13,000 in 2009), you must file Form 709 with the IRS. Reporting your gift must occur by April 15 in the year following the year the gift was made. However, unless your total gift exceeds $1.5 million, you will most likely not have to pay any gift taxes.
Gift Tax Exclusions
The best way to use the gift tax law to your advantage is to be aware of the many exclusions you can use to your tax benefit. The following gifts can be made without having to pay any gift taxes:
- Gifts to your spouse. Without limit, gifts of cash and property can be made to your spouse without having to file Form 709 or pay gift taxes. Your spouse is completely excluded as a taxable gift recipient.
- Payments of medical and educational expenses. If you are paying a family member's education bills or medical bills, the money you spend on these items does not meet the definition of a "gift": money given with nothing of value given in return. Therefore, you do not have to report the money spent or pay gift tax on the money. You should, however, look into using these payments as a tax deduction. Both college tuition expenses and medical payments, if they exceed a certain percentage of your income, can be tax deductible.
- Gifts to political and charitable organizations. Any gift you make to a political or charitable organization is not taxable under the gift tax code.
Gift Splitting
The exclusion allowed for gifts in 2009 is $13,000. You can give any individual up to $13,000 without paying gift tax. However, if you and your spouse split a gift, you can each give up to $13,000 without paying the gift tax. This means that each of your children can receive up to $26,000 a year from you and your spouse without you incurring the gift tax.
