Giving is always a good thing to do. The giver has the pleasure of helping another person and the receiver is fortunate to have a helping hand. An aspect that has made giving such a popular action is the Gift-Tax exemption, A gift tax is a tax imposed on the transfer of ownership of property. The United States Internal Revenue Service says a gift is “Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.
Currently you can give up to $13,000 per year per individual with a maximum of $5.12 million and a household with two adults can give up to $26,000 per year for a maximum of $10 million. Anything above that is subject to a minimum gift tax rate of 35%. In 2013, the tax rate will go to a minimum rate of 55% unless Congress acts before the end 2012.
It is important to remember that not all gifts are taxable. If you pay your child or grandchild’s education expenses, those are tax-free gifts providing you pay directly to the school. You can also pay for a person’s medical bills providing you pay directly to the doctor or hospital. You can gift to your spouse without the money being subject to a gift tax providing your spouse is a U.S. citizen.
However, in 2013 the maximum could drop to $1 million and according to Reuters, there are at least 6 million households with more than $1 million in gifts, making the gift tax a reality for more people than we might think. As you age and amass assets, you may find yourself considering gift tax rules.
The Gift Vs. Estate Tax
The estate tax is a tax you pay to transfer property to somebody else after your death. Just like the gift tax, the estate tax is scheduled to drop to $1 million from the 2012 level of $5.12 million. This means that if you gift $500,000 to somebody, that reduces the estate tax and gift tax exclusion both by $500,000.
Now at the moment the gift tax may not apply to you, but your entire estate may be worth in excess of $1 million once you reach retirement age or older. Although these maximums will adjust with inflation over time, your home and other high-dollar assets may add up to one day surpass the gift or estate tax maximums. If this happens, you may owe a lot more in taxes than you would have if you planned for the event. Because of that, you should meet with an estate planner to develop strategies that can help to reduce your tax bill once you pass away.
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.