Gift Taxes – What, When, How Much, and Exclusions
By Shane Flait © 2008

When you transfer your wealth by gifting or dying, the federal government wants part of ‘the action’. Active giving can trigger a federal gift tax[1] whereas dying triggers the federal estate tax too. Both are paid when you die out of your estate.

Making a gift can trigger a ‘gift tax’. Not all types of gifts are taxed. And you of those that are taxed, only that value of the gift to each person that is above an annual ‘gift exclusion level’ is taxed. 

Below are those yearly tax free gifts you can make:

·         Gifts that are not more than the annual exclusion for the calendar year  - $12,000 in 2008

·         Tuition or medical expense you pay directly to a medical or educational institution for someone

·         Gifts to your spouse who is a citizen

·         Gifts to charity or political organizations for their use.

If the value of your gift exceeds the annual exclusion level, then you must file a gift tax form when you do your yearly taxes. But you don’t pay the gift tax then. You simply need to keep track of it, and pay it when you die – i.e. when someone fills out your estate tax form.

When you die all those gift values that were in excess of your annual exclusion level are added up. The amount of this sum that’s below the ‘estate-filing gift tax’ exclusion level is not taxed.  But anything above this gift tax exclusion is taxed at the gift tax rate. This graduated rate is significant with a top rate of 45% in 2007 through 2009.

And there’s more!
In addition to this Gift Tax, the federal government has another tax called the Generation-Skipping Transfer Tax (GSTT). This is a tax on transfers of property you make, either during life or at death, to someone who is two or more generations below you. That’d start with your grandchild.

This GSTT is also imposed on you at death. And it’s applied in addition to – and not in place of – your federal gift tax or federal estate tax!  But the GSTT has an exemption level of $2 million in 2008.

You need to keep track of all the cumulative generation-skipping transfers you make. Any amount transferred above that is taxed at a flat rate equal to the highest estate tax rate in the year you make the transfer. And that can be quite steep!

 

This table gives the Gift Tax rates and exclusion when filing the Estate Tax Return.

Year	Highest Gift Tax Rate	Gift Tax Exclusion on Estate Tax Return
2007-9	45%	$1 million
2010	35%	$1 million
2011	Return to pre-2001 Tax Act	Return to pre-2001 Tax Act

You can avoid or at least minimize gift and GSST several ways. Rather than gift a lot all at once, you can judiciously gifting annually under the annual exclusion level – to add up to the amount you want to gift.

You can also set up an irrevocable trust and gift to that. If it’s set up correctly (with Crummey provisions) you can gift to that yearly to take advantage of the annual exclusion as well as take the value of the gift out of your estate. Within the trust, it can grow in value and ultimately go to your loved ones ‘gift tax free’ at a later time.

Learn more about efficiently transferring and protecting your wealth. It can save your beneficiaries from losing a lot of what you wanted to give them.

 

Shane Flait is a writer and educator. See more at www.EasyRetirementKnowHow.com