When creating an estate plan, you may have several reasons why you may want to consider making cash gifts to your loved ones. Gift tax applies to lifetime gifts, whereas
estate tax applies to estate assets that you leave behind at death. The concept is that whether you make cash gifts during life or death, they're going to be taxed either way and at the same rate. The idea is that if there were no such thing as gift tax, then people could simply avoid estate tax altogether by giving everything away on their deathbed.
The gift tax is a tax on the transfer of property from one individual to another in exchange for nothing. The IRS considers that you are making a gift if you give someone money without expecting to receive something of equal value in return. If you sell your $100,000.00 house to your daughter for $10,000, you're making a $90,000 gift.
Who pays the gift tax? The donor is the person responsible for paying the gift tax. The general rule is that any type of a gift is a taxable gift; however, the following gifts are not taxable gifts:
- Gifts below the annual exclusion for the calendar year
- Educational expenses for someone else
- Medical expenses you pay for someone else
- Gifts to your spouse
- Gifts to a political organization
- Gifts to qualifying charities
The annual exclusions apply to gifts made to each donee; for example, if you give $14,000 (as of January 1, 2013) to each of your four children, the annual exclusion will apply to each gift. As of 2013, the federal gift/estate tax rate is 40%.
As of 2013, you have the ability to make an unlimited number of $14,000 gifts of cash or other property tax-free. For example, if you give your son $25,000 in cash, $14,000 of it is exempt from gift tax, but you will have to pay gift tax on the remaining $9,000. In order to maximize your tax savings, remember that no one recipient can receive more than $14,000 in a calendar year.
Married couples can double their exclusions; this means together they can give away $28,000 worth of cash or property tax-free per year, per recipient.
The good news is that all gifts made to your spouse are tax-free as long as he or she is a U.S. citizen. If your spouse is not a U.S. citizen, then as of 2013 the limit on tax-free gifts is set at $143,000. With making cash gifts, it's a good idea to consider timing. For example, if you give your daughter $10,000 in December and another $10,000 in January, you can do it tax free. However, if you gave your daughter $20,000 in December, you would have to pay gift tax on $6,000.
To learn more about gift taxes and the federal estate tax, contact me, attorney Susan E. Durre. As a
Miami probate attorney with over 30 years of experience and an AV® Rating from Martindale-Hubbell®, I have the knowledge and experience to assist you with your estate and tax planning matters!