Gift and Estate Tax

Gifts that aren't taxable include tuition, medical expenses, gifts to your spouse, gifts to a political organization and charitable donations.

Estate tax may be applied to your taxable estate at your death.

You could pay lower taxes on appreciated securities by giving them to your child.

If you gave someone gifts valued more than $12,000 ($13,000 for 2009), you must report the total amount of gifts to the IRS and may have to pay tax on the gifts. If you or your spouse make a gift to a third party, the gift can be considered as made half by you and half by your spouse (known as gift splitting). Gift splitting can allow you to claim a larger exclusion. For example, if in 2008 you made a $20,000 gift to an individual, you can exclude only $12,000. But if you elect gift splitting, both you and your spouse can exclude $10,000, for a $20,000 total exclusion. The person who receives your gift doesn't have to report it to the IRS or pay gift or income tax on its value.

Taxable Gifts

Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something for less than its value or make an interest-free or reduced-interest loan, you may be making a gift. There are some exceptions to the tax rules on gifts. The following gifts don't count against the annual limit:
tuition or medical expenses you pay directly to an educational or medical institution for

someone's benefit

gifts to your spouse

gifts to a political organization

charitable donations

Estate Tax

The money and property you own when you die (your estate) may be subject to federal estate tax if the estate is worth more than the applicable exclusion amount. Most relatively simple estates (cash, publicly traded securities, small amounts of other, easily valued assets, and no special deductions or elections or jointly held property) with a total value less than $2 million and a date of death in 2008 ($3.5 million for decedents dying in 2009) do not require the filing of an estate tax return. Additionally, the person who receives your estate generally won't have to pay an estate tax or an income tax on the value of the inheritance.

Reduced Tax on Appreciated Securities

If you give your child appreciated securities (such as stock or mutual fund shares), the tax bill on the increase in value is passed on to the child along with the gift. For example, stock you bought for $2,500 is now worth $5,000. If you sold the stock, you'd owe tax on the $2,500 gain. The 15% rate on long-term capital gains means it would cost you $375. If you gave the shares to your child, the same $2,500 would be taxed, but at your child's rate. His or her income may be low enough to allow his or her long-term gains to be taxed at the 0% long-term capital gains rate in effect for 2008–2010. If that's the case, you eliminate the tax bill.

Also Read:

Charitable Donations
Saving for Education
Year-end Planning

Gift Taxes

If you gave any one person gifts in 2008 that valued at more than $12,000, you must report the total gifts to the Internal Revenue Service and may have to pay tax on the gifts.

The person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value.

Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.

There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:

Tuition or Medical Expenses that you pay directly to an educational or medical institution for someone's benefit

Gifts to your Spouse

Gifts to a Political Organization for its use

Gifts to Charities

If you are married, both you and your spouse can give separate gifts of up to the annual limit to the same person without making a taxable gift.

For more information, call us or get the IRS Publication 950, Introduction to Estate and Gift Taxes, IRS Form 709 or 709-A, United States Gift Tax Return, and Instructions for Form 709.

Taxing Those Generous Gifts

• Gifts that aren't taxable include tuition, medical expenses, gifts to your spouse, gifts to a political organization and charitable donations.
• Estate tax may be applied to your taxable estate at your death.
• You could pay lower taxes on appreciated securities by giving them to your child.

If you gave someone gifts valued more than $12,000, you must report the total gift to the IRS and may have to pay tax on the gifts. If you're Married Filing Jointly, the tax-free amount doubles to $24,000. If you or your spouse make a gift to a third party, the gift can be considered as made half by you and half by your spouse (known as gift splitting).The person who receives your gift doesn't have to report it to the IRS or pay gift or income tax on its value.

Taxable Gifts

Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift. There are some exceptions to the tax rules on gifts. The following gifts don't count against the annual limit:

• tuition or medical expenses you pay directly to an educational or medical institution for someone's benefit
• gifts to your spouse
• gifts to a political organization
• charitable donations

Estate Tax

The money and property you own when you die (your estate) may be subject to federal estate tax if the estate is worth more than the applicable exclusion amount.

Most relatively simple estates (cash, publicly traded securities, small amounts of other, easily valued assets, and no special deductions or elections or jointly held property) with a total value under $2 million and a date of death in 2006 or 2007 do not require the filing of an estate tax return.

Additionally, the person who receives your estate generally won't have to pay an estate tax or an income tax on the value of the inheritance.

Reduced Tax on Appreciated Securities

If you give your child appreciated securities (such as stock or mutual fund shares), the tax bill on the increase in value is passed on to the child along with the gift.

For example, stock you bought for $2,500 is now worth $5,000. If you sold the stock, you'd owe tax on the $2,500 gain. The 15% rate on long-term capital gains means it would cost you $375.

If you gave the shares to your child, the same $2,500 would be taxed, but at your child's rate. His or her income may be low enough to allow him or her to be taxed at the 5% long-term capital gains rate. If that's the case, the tax bill would be reduced to $125.

S. Raines, Sr. Financial Advisor/Tax Preparer