Did you know that the federal government has established guidelines for gift tax exemptions and gift tax rates for all property? While these guidelines are generous– everyone has a lifetime gift tax exemption of $1,000,000– it’s still important for you to understand them.
In 2007 and 2008, the IRS determined that gifts under $12,000 per person, per year, were exempt from a federal gift tax. Gifts over the annual $12,000 per person limit are called “taxable gifts.” In the case of a “taxable gift,” IRS Form 709 would have to be filed. Remember, you have a lifetime gift tax exemption of $1 million, so even though you may be required to file a federal gift tax return, unless you have exceeded your $1 million lifetime exemption, you will not actually owe any federal gift taxes.
If you are married and filing joint tax returns, each of you is allowed to gift $12,000 per recipient, yearly, tax-free. In other words, if you are married and have two children, as a couple, you can gift up to $48,000 annually without having to file a gift tax return.
Another key point to keep in mind, especially if you’re gifting toward the end of the year, is that the IRS counts the gift on the day the check is cashed, not on the day the check was written.
There are other gifts that are considered exempt from gift taxes assuming they meet the following guidelines:
Tuition expenses – Tuition payments to assist an individual’s educational cost must be made directly to the qualified institution, not the individual. The payment must be used to fund the cost of attending the school and may not be used to pay for books or other educational supplies.
Medical expenses – Medical expenses to assist an individual must be made directly to the medical facility, not the individual. And, those expenses may not be eligible for reimbursement by any insurance coverage.
Gifting between spouses – Gifts between spouses are unlimited.
Charitable gifts – Gifts made to qualified charitable organizations are also unlimited.
As it is said, “giving is so much better than receiving.” While it is gratifying to give, most of us do not feel the same way about paying gift taxes. Therefore, when making a substantial gift or a series of gifts, consult with your advisors to ensure you are taking full advantage of your exemptions and not inadvertently placing yourself in a taxable position.