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Can You Avoid the Estate Tax With the Gift Tax?

So, you want to give away some of your assets.  Maybe your grandchildren could use some cash.  Maybe your daughter and son-in-law need a down payment for a house.  Maybe you want your heirs to enjoy their inheritance now, before you leave this good earth.  Regardless of your reason for giving away cash, property, or any other personal asset, the IRS wants a piece of the action.  They cover this nicely with what’s called the Gift Tax.

A gift is any time you give property away with no expectations of getting anything in return.  It’s also considered a gift if you sell something to someone at a hugely discounted price, one that’s obviously a nominal amount.

What is the Gift Tax?

You may have noticed that any time money changes hands, there’s a way for the IRS to get some of it.  Think about it: sales tax: when something is sold, money changes hands.  The IRS gets a bit.  Selling a house?  If you make over a certain amount in profit, you’ll also be giving some to the IRS.  Well it’s the same for giving away property (property means cash, real estate, stuff…).

The gift tax is the IRS’s way of disallowing people the option of avoiding the estate tax.  The estate tax places a tax on property that’s inherited when someone becomes deceased.  So, the elderly, with the help of estate planners in some cases, give away money before they die so as to avoid the estate tax.  But you can only give away a certain amount before the gift tax kicks in.

How the Gift Tax Works

Well you’re allowed a certain amount before you get hit with the gift tax.  Each year or couple of years that amount goes up a bit, to keep up with inflation, or when Congress changes the tax code to hopefully more fairly tax the American people.  The certain amount you’re allowed is called the gift tax exclusion because there’s a certain amount that’s excluded from taxation.  For four years from 2009 to 2012 the amount you could give away and not get hit with the gift tax was $13,000.

The 2013 gift tax exclusion amount is $14,000.  For the past ten years, when the exclusion amount did go up, it went up by $1000.  For more details on the Gift Tax (and the Estate Tax) see IRS Publication 950, Introduction to Estate and Gift Taxes.

How to File the Federal Gift Tax Return

It’s IRS form 706, available on the IRS website or for most people doing their taxes with tax preparation software, it’s built into the program.  If you take your taxes to someone to have athem done for you, they’ll ask you if you received any gifts…don’t tell them what you got for your birthday!  They’re asking you if they’re going to need to fill out form 706 and possibly declare having received property, thus having to pay the Gift Tax.