Avoiding Confusion With Gift Taxes

Confused as to when gift taxes are owed? Here's an explanation.

Gift taxes seem like a lump of coal, but many gifts aren’t subject to a gift tax.

Minnesotans aren’t subject to a state gift tax, but there is a federal gift tax.

However, even the federal government allows you to give a significant amount of gifts annually to each individual on your Christmas list without giving even a thought to the Internal Revenue Service.

Even if you exceed the federal annual exclusion limit – set at $13,000 per person for 2012 and $14,000 for 2013 – you still may not need to pay gift taxes. Exceeding the annual limit just triggers a requirement that you, the gift giver, file a federal gift tax return. Filing is a hassle to be sure, but the filing is not necessarily accompanied by a tax bill.

When do you incur federal gift taxes? Gift taxes occur only when all of the gifts given during your lifetime exceed a certain amount set by federal law. Remember, gifts at or under the annual exclusion amount aren’t even counted in this tally. It is only the excess above the annual exclusion amount that applies.

The so-called lifetime exclusion amount for gifts is joined with the federal lifetime estate tax exclusion. Consequently, whether the gift is made during one’s lifetime or at death, you or your estate will pay taxes on amounts transferred to others that are above the ceiling – the lifetime exclusion. Think of it this way: if you use up this federal lifetime exclusion during your life, you reduce the exemption available for your estate at your death.

In 2012, that lifetime exclusion is $5,120,000 – a larger exclusion than most Americans will ever need. However, that lifetime exclusion from taxation is scheduled to change to $1 million in 2013 unless changed by Congress. The lifetime number is caught up in the “fiscal cliff” discussions in Congress. It is uncertain what the final lifetime number will be starting in 2013. 

On the other hand, the $14,000 annual exclusion amount is not part of the current Congressional debate. The annual exclusion for gift taxes stood at $13,000 for 2009, 2010, 2011 and 2012. It is indexed for inflation, but only in $1,000 increments.

(Note that although Minnesota does not have a state gift tax, it does have a state estate tax. The exclusion from Minnesota estate taxes is $1 million per person currently, and that number is not expected to change soon.)

In addition to the annual gift exclusion, certain other categories of gifts are also excluded as taxable gifts. For example, you can give gifts of unlimited value to your spouse whether those gifts occur during your lifetime or upon your death. Your payment of tuition or medical bills for someone other than yourself also avoids classification as a taxable gift if you make the payment directly to the institution involved. Similarly, gifts to political organizations are not taxable gifts. Charitable gifts may also be made without incurring a gift tax.

©2012 Wittenburg Law Office, PLLC. All rights reserved.

Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

Bonnie Wittenburg, Wittenburg Law Office, PLLC, Minnetonka, MN 952-649-9771 bonnie@bwittenburglaw.com    www.bwittenburglaw.com

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