The annual gift tax exclusion will increase from $12,000 to $13,000 effective January 1, 2009. In other words, an individual will be able to gift $13,000 per person and a couple may give $26,000 per recipient every calendar year without any gift tax ramifications. Therefore, a couple with three children will be able to gift $78,000 without filing a gift tax return.
It is important to note that these gifts are not deductible, as is often believed to be the case. If only one spouse makes the gift, it is important for the couple to elect to split the gift on the gift tax return (IRS Form 709) so the gift will not be attributed solely to the one spouse.
If an individual gifts in excess of the annual exclusion amount, the gift must be declared, and a gift tax return must be filed by April 15 in the year following the year in which the gift was made. In this way, the IRS can maintain a running tab showing how much of the “lifetime exclusion” has been used up.
Many individuals erroneously believe that if you gift in excess of the annual amount that you must pay gift taxes, which is not the case. Rather, if an individual gifts in excess of the annual exclusion, he simply utilizes some of his lifetime gift tax exclusion, which is currently $1,000,000. In other words, he will not incur a gift tax until he gifts in excess of $1,000,000 over the course of his lifetime.
Readers must be aware that there are other exceptions to the gift tax rules in addition to the annual exclusion. For example, there is a “marital deduction,” and any gifts to a spouse will not incur gift tax consequences provided the spouse is a U.S. citizen. In addition, payments for tuition or medical care made to other individuals are also excluded, but the payments must be made directly to the education institution, hospital or doctor.
In order to qualify for the annual exclusion, the gift must be of a present interest. A gift of a future interest does not qualify for the gift tax exclusion. Therefore, a gift into a trust that does not give the beneficiary the right to use the gift presently, will not qualify for the annual exclusion.
Further, as a result of the “unified credit,” any taxable gifts will count against an individual’s allowable estate tax exclusion, which is $2 million in 2008, increasing to $3.5 million in 2009.
There is a popular misconception that the recipient of a gift will incur some type of tax. This is not the case. The only tax incurred by the recipient of a gift is income tax on any interest or dividends earned after the gift was received.
It is important to understand the ramifications of making a gift of property that has appreciated in value. The recipient of a gift will take on the “cost basis” (essentially the cost for purposes of determining gains taxes) of the property. As such, the donor of the property should inform the recipient of the fair market value of the property when the property was acquired as well as the cost basis of the property. When the recipient ultimately sells the property, if there has been a gain the recipient will pay income tax on that gain.
Finally, as a result of the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax is to be repealed in 2010 and will return in 2011 with an estate tax exclusion of $1 million. However, the lifetime exclusion is not scheduled to change, and gift tax exclusion is to remain constant, indexed to inflation. Most estate planners believe that congress will negotiate a higher exclusion amount prior to 2010.
Ronald Fatoullah & Associates is highly recognized throughout the New York area for their expertise and outstanding services in the areas of elder law and estate planning. Ronald Fatoullah is proud to have been selected as one of New York Magazine’s “Best Lawyers” for three consecutive years in the fields of elder law, trusts & estates, and he is the legal advisor to this magazine. This article was written with the assistance of Stacy Meshnick, Esq., senior staff attorney and Medicaid supervisor at the firm. To reach Ronald Fatoullah & Associates please call: 718-261-1700 or 1-877-Elder Law.