Giving gifts to family and friends during your lifetime
permanently removes money or other assets from your estate,
reducing any future estate tax. Under current law, only the
wealthiest Americans need to worry about the federal estate tax,
but those limits expire at the end of 2012. So even taxpayers of
more modest means may want to take full advantage of the annual
gift-tax exclusion -- because once the year is over, your 2012
exclusion is gone forever.
12 Year-End Tax Moves to Make Now
You can give up to $13,000 to as many people as you want in 2011
without filing a gift-tax return. And you and your spouse can give
up to $26,000 to anyone you wish. Next year, the value of the
gift-tax exclusion will rise to $14,000, and you can start all over
If you give a gift that exceeds the annual exclusion amount,
you'll have to keep track of your largesse by filing a gift-tax
return -- Form 709. Gift taxes are paid by the grantor, not the
There's a special exception for contributing to a 529 college
savings plan: You can contribute up to $65,000 to a 529 college
savings plan for your child, grandchildren or other recipient and
spread the contribution over five years tax-free. But you must file
a gift tax Form 709 to document the spread.
You don't get an income-tax deduction for such gifts, but
there's an important advantage: Assets given away during your life
-- and any future appreciation -- won't be included in your estate
to be taxed after you die.
But taxes are seldom owed, even on substantial gifts. Everyone
gets a credit that exempts up to $5.12 million of taxable gifts
over your lifetime ($10.24 million for married couples). The tiny
fraction of estates that do trigger the tax are taxed at a flat
rate of 35%.
However, the lifetime exemption drops to the previous limit of
$1 million and the tax rate jumps to 55% in 2013 unless Congress
comes up with a new deal. Another provision of the law -- the
portability feature which allows the surviving member of a couple
to claim any unused portion of the exemption -- is set to disappear
in 2013 as well.
That doesn't mean you should start handing out big checks to
your children and grandchildren (see
Protect Your Estate From Greedy Heirs
). Gifts must be irrevocable (otherwise, the IRS doesn't consider
them gifts), so you can't ask for the money back if you come up
short. But if you have more than $1 million in assets, review your
estate plan before year-end, says Irvin Schorsch, president of
Pennsylvania Capital Management. Talk to an estate-planning
attorney about setting up trusts and other vehicles that will allow
you to take advantage of the current exemption to transfer wealth
to your children or grandchildren, tax-free.