In government benefits planning, relatively large amounts are often transferred between between generations. A common response is, “But if I make a gift of more than $10,000 I have to pay gift tax.” I have this conversation so often I could do it in my sleep, but the lesson in a nutshell is, don’t worry about it.
First off, the exemption is $13,000 in 2012, not $10,000. The exemption has been adjusted for inflation over the last decade. If a financial planner or adviser talks about “the $10,000 exemption,” that is a clue that he or she is lost in time or financially illiterate.
Secondly, the exemption is per person, per person, per year, and can be split between spouses. The redundancy in the last sentence was intentional. One person can give one person $13,000 per year, without any obligation to file a gift tax return. One person can give two people $13,000, each, or $26,000, per year. Usually the gifts are to family members, but not necessarily. Sylvia Gotrocks can give her hairdresser, her psychic, her daughter, her uncle, her incarcerated penpal, her masseur, and her best worst frenemy an annual $13,000 gift, each. If Sylvia is married, she can give each of the above seven donees $26,000. That would be $182,000 in gifts, with no gift tax return needed. If all of the above donees are married, the gifts can be doubled again, to $364,000.
Furthermore, none of the above donees needs to report the gift to the IRS. Gifts are not income to the recipient. The only tax consequences to the recipient are when the property generates income or is sold for more than the donor’s tax basis.
For example, if Sylvia and her husband give Stymie Grimes, her feng sui consultant, and his wife $52,000 worth of Trojan Corporation stock, there is no gift tax consequence. However, dividends would be taxable to Stymie and he would pay capital gains tax based on Sylvia’s tax basis when the stock is sold.
If gift taxes are still a concern because a donor wants to give a donee an amount that would exceed the exemption amount, there is a $5.12 million estate and gift tax-free estate in 2012. The tax-free amount may drop to $1 million in 2013, but that is still a lot of money. Very few people have to worry about hitting the gift tax threshold.
To explain the tax-free estate a little better, assume that Sylvia gives Fermi Strokes, her dog’s canine chiropractor, $52,000. Sylvia is married, but Fermi is not. This is a $26,000 taxable gift. However, Sylvia can apply the taxable gift against the $5.12 million tax-free estate, reducing it to $5,094,000. Until Sylvia’s gifts exceed the tax-free estate, she does not need to pay gift tax. However, her tax-free decedent’s estate will be reduced by her taxable gifts when she dies.
This is a simplified explanation of a complex topic that comes back to the original message: Do not worry about it unless you are uncommonly wealthy. A married person, can give a married son or daughter $52,000 per year with no – repeat no — gift tax consequences. Over the annual per person, per person exclusion, a gift tax return is necessary. But there would be no negative tax consequences unless the donor is worried about exceeding the $5.12 million limit ($1 million after 2012 if Congress does not act) on the tax-free estate for Federal Estate and Gift Tax.
John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com ©2012 John B. Payne, Attorney