If you send your friends and relatives large gifts there is a good chance that you are going to have to pay federal gift tax. This article is going to provide you with the basic things that you need to know about gift tax.
Gift Tax Kicks in After a Lifetime Gift Limit Exceeds $5.12 Million (2012)
The first thing that you need to know about gift tax is that it is the person who gives the gift that has to pay the tax and not the person that receives it. However, the good news is you will not have to pay any taxes until you have given away more than one million in cash or assets.
In 2012 the lifetime gift limit was raised to $5.12 million. So, many people do not have to worry about paying gift tax since the amounts are so high. However, even if you do not owe any gift taxes you may have to file. So, make sure you read this entire article.
The Annual Gift Tax Exclusion Provides Additional Shelter
The annual federal gift exclusion makes it so you can give away up to $13,000 in 2012 to as many people as you like without it going towards the $5.12 million lifetime exemption. In future year’s inflation may cause the exclusion to increase.
Gift Taxes and Estate Taxes Are Connected
Thanks to President Obama signing the 2010 Tax Relief Act in 2012 you have a $5.12 million maximum federal estate tax exemption. This means that you can leave up to that amount to your friends or family and it will be free from federal estate taxes.
However, if you are married your spouse gets a separate exemption. In 2011, the gift tax and estate tax was reunified with an exclusion amount of $5.12. Additionally, if you give gifts while you are alive you will reduce your taxable estate. However, gifts that exceed the annual exclusion will reduce your estate tax exemption.
Overall, when making annual gifts up to the limit you are reducing your taxable estate without having to worry about negative consequences.
Special Rules for 529 Plan Contributions
Contributions to a 529 college savings plan are what are referred to as gifts to a future student. However, there is a special rule that makes it so you can make a lump-sum contribution and spread it out over five years for gift tax purposes. This means you can spread the gift out over 2012-2016 without getting hit with gift tax and without decreasing your $5.12 million lifetime gift tax limit and estate tax exemption. However, if you make any other gifts to that same recipient during those years it is going to count towards both exemptions.
Some Gifts are Tax Exempt
Some gifts that you give you can give unlimited times without any consequences. Gifts that would fall into this category include: gifts to IRS approved charities, gifts to your U.S. Citizen spouse, gifts that were paid to a medical service provider for someone’s medical expenses, and gifts that were made to educational institutions for someone’s college tuition expenses.
When to File a Gift Tax Return
Any time you give a taxable gift that goes over the annual exclusion you have to file Form 709: U.S. Gift Tax Return. This must be done even if you do not owe gift taxes. The return is due at the same deadline as the 1040 (April 15th) or you can extend to file by October 15th.
If you are married a joint gift tax return is not allowed. Each spouse is responsible for filing their own return. However, you can split the gifts among each other. By doing this you will be able to take advantage of both exclusions. However, both spouses have to agree to this before it is done.
If you file your taxes with TurboTax they will ask you a few simple questions to insure that you get all of the tax deductions and credits that you qualify for. If you would like to see how much your tax refund will be, they have a free tax refund calculator available.
Additionally, keep in mind that if you file with TurboTax you will not need to know the tax law or which tax schedules to fill out because they put your information on all the appropriate IRS tax forms.