With the gift-giving season upon us, it is a good time to review the current tax rules related to gifts, and to highlight a particular opportunity in 2010. The basics:
- Gifts between US citizen husbands and wives are exempt from federal gift tax.
- Each person may give up to $13,000 per year to any number of other people, free of federal gift tax. For spouses, this is a $26,000 exemption.
- A $1 million lifetime exemption offsets aggregate gifts that exceed the $13,000 annual exclusion gifts.
- Federal gift tax is due when the $1 million lifetime exemption has been exhausted.
For 2010 only:
We are in the final weeks of the year and Congress has not yet addressed the federal estate and gift tax situation that exists this year, including the absence of a federal estate tax and a gift tax rate of only 35% (as compared to the maximum 45% rate that applied in 2009 and the 55% maximum rate that is scheduled to apply in 2011). Most experts agree it is unlikely there will be retroactive legislation that will affect 2010 gifts and estates, providing a window of opportunity to make gifts at an historically low tax cost.
There are several benefits to making taxable gifts in addition to the rate spread between 35% and either the 45 or 55% rate that is likely to apply in 2011 and later years:
- Gift tax is “tax exclusive,” meaning that a donor pays tax only on the gift that remains in the recipient’s hands, while the estate tax is “tax inclusive” in that tax is owed on all assets in the estate, including the tax dollars themselves. (Note there is an exception to gift tax exclusivity if the donor dies within three years of making the gift; in that case, the gift tax dollars are subject to estate tax.)
- DC and Maryland do not have a gift tax, but both have an estate tax that is in addition to the federal estate tax. Thus, DC and Maryland residents could save their heirs taxes by giving them assets during lifetime rather than at death.
- After a gift, the future appreciation and income from the assets given away will escape estate tax on the donor’s death.
Of course, there is still some risk that legislation will be enacted to change the 2010 estate and gift tax laws retroactively. Moreover, the exemption from estate tax may increase in the future beyond the $1 million level that is now on the books for 2011, either to the $3.5 million level that was in effect in 2009 or possibly to a higher level.
An in-depth discussion of gifting and generation-skipping techniques is beyond the scope of this post. Our intention is to bring the 2010 planning opportunities to our readers’ attention, and, thus, any taxable gift should be made only after obtaining legal, tax and possibly financial planning advice from qualified professionals.