Many of you have already filed your tax returns for this year, and are moving on to financial planning in 2010. While it’s not top of mind right now, one thing that you can do before the end of the year is give a certain amount of money to your relatives or other individuals without getting taxed. Keep this in mind as birthdays, holidays and summertime fun approach quickly in 2010.
You might be thinking, “it’s my money and I’ll do with it what I want.” Nice thought, but not quite true. You needed to account for it when you earned it, and likely paid tax at that time, and you need to be aware of the rules for giving it away if that’s your intention. Why would you want to do that? The estate tax, also sometimes called the the death tax, is due to return with a vengeance next year unless congress acts. The estate tax exclusion has ticked up over the years, $3,500,000 in 2009, and this year going away altogether (in favor of a limited basis adjustment) but only to return to $1,000,000 next year. Gifting while you’re still alive can minimize or eliminate the potential estate tax. You know, few things say ‘I love you’ as well as a big check.
Let’s start with the simplest gift issue. You can give your spouse an unlimited of cash or anything of value with no gift consequences. If your spouse is not a citizen the limit is $134,000 for 2010 rising with inflation each year.
For anyone else, you may gift $13,000 per year per person with no tax due and no paperwork required. Your spouse has the same opportunity, so between you, that’s $26,000. If you have two children and they are married, you can see how this can multiply up pretty quickly.
There are some exceptions to this limit. You may pay anyone’s medical bill or higher education expenses with no concern for the limit. To avoid running afoul of the rules, the funds must be sent directly to pay the bill, you cannot send your child a check for $40,000 even if he writes his college a check the same day you’ve just gifted in excess of the limit. Gifts to qualified charities are also not subject to gift taxes regardless of the amount.
There is also an opportunity to transfer more than the $13,000 per person by taking advantage of the 529 college savings account. Current tax law permits you to gift up to 4 years in advance, i.e. a present gift of $65,000. This strategy will require a properly filled out Form 709 the gift return to claim this gift even though no tax is due.
If you exceed the limits, you can still avoid owing taxes by filing the 709 and use up a portion of your unified credit. Simply put, the credit covers the taxes due on the first $1,000,000 worth of assets left to a beneficiary or gifted. The math works out that the credit for gift tax is $345,800, but it’s easier to think of it as the tax on that $1,000,000 you can gift while you are alive, above and beyond any $13,000 gifts or other excluded gifts.
It’s also prudent to use the 709 to account for any large dollar transactions involving family. For example, you sell a house to a child for $250,000. Years from now, when you pass on, the IRS, while auditing your estate return, may decide that the house was worth far more and assess estate taxes. By filing the 709 and declaring the value of the transaction, you’ve started the 3 year clock on the IRS, once passed, the transaction cannot be questioned.
If you are in a position where gifting may be a strategy you are considering, be sure to understand the rules to avoid any mistakes that can be costly to you and your heirs. Any questions you wish to ask here, there are many ready and eager to help.