The Gift Tax Exclusion: Use It or Lose It


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.

SEE ALSO: 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 again.

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 recipient.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Personal Finance , Taxes

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