Legal Specs

Here Are Some Interesting Tidbits About the Annual Gift-Tax Exclusion

12 Mar 2006

Here are some interesting tidbits about the annual gift tax exclusion that you should be aware of:

1. No gift taxes are imposed on the first $12,000 in gifts that you make to any person during 2006. This exclusion from federal gift taxes is known as the "annual gift tax exclusion." This exclusion is indexed for inflation so that the amount will vary from year to year in $1,000 increments. Originally, the exclusion amount was $10,000. In 2005, the amount was increased to $11,000 and, for 2006, the amount was increased to $12,000.

2. This exclusion applies only to gifts of a present interest. In other words, the gift must have no strings attached. The recipient must be able to use and enjoy the gifted property immediately. There are certain exceptions, however, such as gifts to a 529 plan where the money will be used for future tuition payments.

3. This exclusion amount applies to every person to whom you make a gift during the year. For example, if you give $12,000 to Harry and $8,000 to Mary during 2006, no gift taxes are due. However, if you give $12,001 to Harry and $8,000 to Mary during 2006, the $1 given to Harry in excess of the annual exclusion amount is subject to the federal gift tax. (But see gift-splitting between spouses discussed below.)

4. If you make gifts to any person during a calendar year that exceed the annual gift tax exclusion (i.e., the $1 to Harry during 2006), you are required to file a federal gift tax return (Form 709) . Form 709 is required to be filed for each calendar year that a taxable gift is made, and must be filed by April 15th of the following year.

5. If you are married, both you and your spouse are entitled to the annual gift tax exclusion. Both of you could, for example, give $12,000 to, say, your daughter during 2006, for a total of $24,000, without either of you having to file a gift tax return. Think of the planning possibilities here. Assuming for the moment that you have a married daughter with two children, you and your spouse could each give your daughter, her husband, and each child $12,000 during 2006. That's a total of $96,000 that the two of you could transfer to them gift-tax free. Remember, too, that the recipients of your gifts do not have to pay any gift taxes, or income taxes, or any other taxes on those gifts.

6. In our example above, we sort of implied that you would give $48,000 to your daughter, her husband, and their two children ($12,000 x 4) and your spouse would do the same. But, what if your spouse doesn't have the money to give? In that case, you and your spouse could elect to treat all gifts made by either of you as made 1/2 by each of you, regardless of whom actually gave the money.

7. On further point. Gifts from one spouse to another do not fall under these annual gift tax exclusion rules. That's because the gift tax laws totally exempt any and all gifts from one spouse to another from any gift taxes. This is known as an "unlimited marital deduction." You should be aware, though, that there is an exception for so-called "terminable interest" gifts and there is a special limitation for gifts to spouses who are not U.S. citizens. For more information on this, please take a look at the instructions for Form 709.

Next time, we'll discuss how you go about gifting real estate to your children and having it all come under the annual gift tax exclusion.

Attorney Michael P. Pancheri is a practicing attorney and the founder and CEO of the Living Trust Network. You may contact him by email at info@livingtrustnetwork.com. You may also contact him at the Living Trust Network's web site. Its URL is http://www.livingtrustnetwork.com.

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