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Annual Gift Tax Exclusion
Taxpayers can transfer substantial amounts to their children or other donees free of gift taxes through the proper use of the annual gift tax exclusion. The amount of the exclusion for 2011 is $13,000.
The exclusion covers gifts an individual makes to each donee each year so a taxpayer with three children can transfer a total of $39,000 to them every year free of federal gift taxes. If the only gifts made during a year are excluded this way, there is no need to file a federal gift tax return. If the annual gifts exceed $13,000 for one done then the exclusion covers the first $13,000 and only the excess needs to be reported on the gift tax return. Further, even reportable “taxable” gifts may result in no gift tax liability thanks to the unified credit. This means that although a gift tax return may need to be filed, there would be no tax to pay due to the unified credit that is outlined below.
“Unified” credit for taxable gifts. Even gifts that are not covered by the exclusion, and that are taxable, may not result in a tax liability. This is so because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime. The unified credit amount does change and so you should discuss with an advisor for more details on how this works. With the new tax law changes, the unified gift and estate tax exemption is $5,000,000.
Gift-splitting by married taxpayers. If the donor of the gift is married, gifts to donees made during a year can be treated as split between the husband and wife, even if the cash or gift property is actually given to a donee by only one of them. By gift-splitting, therefore, up to $26,000 a year can be transferred to each donee by a married couple because their two annual exclusions are available. For example, a married couple with three married children can transfer a total of $156,000 each year to their children and the children's spouses ($26,000 for each of six donees).
When gift-splitting occurs, both spouses must consent to it and should be indicated on the gift tax return the spouses file. IRS prefers that both spouses indicate their consent on each return filed. (Because more than $13,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $26,000 exclusion covers total gifts.
Types of Gifts: Gifts do not need to be in the form of cash, but can be investments and real assets as well. Sometimes non-cash gifts can make sense since the donee would pay the taxes on any appreciation. For example, if you gifted some stock that had appreciated in value and the donee sold the stock, the donee would pay the taxes on the difference between the sales price and your original the purchase price. This not only provides the donee with a gift but also excludes the tax burden from your return.
For a gift to qualify for the annual exclusion, it must be a gift of a “present interest.” That is, the donee's use of the gift can't be postponed into the future. There is, however an exception to this rule: If the donee of a gift is a minor and the terms of the trust provide that the income and property may be spent by or for the minor before he reaches age 21, and that any amount left is to go to the minor at age 21, then the annual exclusion is available. These arrangements allow parents to set assets aside for future distribution to their children while taking advantage of the annual exclusion in the year the trust is set up.
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