SolveYourProblem
Article Series: Taxes
Help Me Understand My Taxes
What
Is a Gift Tax?
When you do something nice for someone, like
giving them a financial gift, the last thing you want is to
be smacked in the face at the end of a year with a tax bill
for that money. Gift tax is something many people overlook
when they are helping out their family and friends, and it
can sneak up on you and land you with a hefty fine, if you
don’t play your cards right. The good news is that there are
lots of ways to give financial gifts without being subject
to the gift tax and recent increases to the limit for tax free
financial gifts has made this even easier.
First, let’s clear up what exactly gift tax is. Gift
tax is a tax on money and valuables that you distribute
to family
and friend over the course of your lifetime. There is a both
a yearly maximum amount of gifts and goods you can give someone
tax free, and a lifetime limit for financial gifts. The annual
limit is $12,000 in money and goods per person; that means
you can give $12,000 to as many people as you like without
triggering the gift tax. Over the course of a lifetime, you
can give as many individuals as you like a total of $2 million
in money and goods. This $2 million include money and goods
given in life combined the amount left in your estate. Anything
above that amount is taxable under the gift tax law.
When you give someone a gift above these amounts, it
is you who is responsible for the gift tax, not the recipient. If
the amount of money in your estate exceeds $2 million, and
you have left your estate to a single person, than the money
is directly withheld from your estate.
If you want to give more than $12,000 a year to a single person,
there are some ways to get around the gift tax. If the financial
gift is intended to pay for tuition, hospital bills, rent,
or living expenses, pay the institution directly rather than
giving the money to the individual to reimburse. If you are
married, than both you and your spouse are each eligible to
give $12,000 a year, so one of you can give a $12,000 gift,
and the other can give a gift for the remaining amount you
wish to give away. If the recipient of the gift is married,
they and their spouse can each receive $12,000 individually
without paying gift taxes, so make gifts to each of them separately.
If you want to save money for your child’s college education,
you can pay up to $12,000 a year into a college savings account
tax free, without the entire account becoming subject to gift
tax.
If you must give a gift that exceeds $12,000 and there is
no way to avoid triggering the gift tax, don’t panic. Merely
reporting the gift doesn’t guarantee that you will be hit up
for money from the IRS. It is usually gifts in the hundreds
of thousands of dollars, which begin to actually cost the giver
some money. If you know that gift tax is going to be an issue
for you, plan wisely. Look for other deductions in your tax
bill. Make a charitable donation that can be a write off for
you, or determine if any of your business or living expenses
qualifies as deductions. When you are transferring large sums
of money and dealing with complicated issues like gift taxes,
getting a financial advisor involved will minimize your out
of pocket expenses and make sure you have gone about everything
in the correct manner.
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SolveYourProblem.com : 2007
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