The first thing to know about the federal gift tax is that gift givers, not gift recipients, have to pay it. Thankfully, you won’t owe the tax until you’ve given away more than $1 million in cash or other assets during your lifetime. If you’re married, your spouse is entitled to a separate $1 million exemption. But you may still have to file gift tax returns even though you don’t owe any tax. So please keep reading.
The annual exclusion allows you to give away up to $13,000 in 2010 to as many people as you wish without those gifts counting against your $1 million lifetime exemption. Say you give two children $20,000 each in 2010 and give another relative $10,000. The $20,000 gifts are called taxable gifts because they exceed the $13,000 annual exclusion. But you won’t actually owe any gift tax unless you’ve gifted your $1 million lifetime exemption. O if not, the two taxable gifts simply reduce your lifetime exemption by $14,000 [($20,000 - $13,000) x 2 = $14,000]. The $10,000 gift is ignored, because it’s below the $13,000 annual exclusion. If you started off 2010 with the full $1 million lifetime exemption, you’ll still have an exemption of $986,000 left at the end of the year ($1 million – $14,000 = $986,000).
Contributions to a 529 college savings plan are gifts to a future student. However, special rules allows you to make a lump-sum contribution and spread it over five years for gift tax purposes. For example, you can contribute $65,000 in 2010 to jump-start a 529 college savings account for your child. If you’re married, your spouse can do the same. You can spread the gift over 2010-2014 without incurring any gift tax and without reducing your $1 million lifetime gift tax exemption. Your spouse can spread his or her $65,000 gift over five years as well. The only caveat: You can’t make any additional gifts to the same recipient during those years without using part of your $1 million exemption.
Some types of gifts are exempt from the federal gift tax so you can make unlimited gifts in these categories without any gift tax or estate tax consequences and without having to file gift tax returns: Gifts to IRS-approved charities Gifts to your spouse (assuming he or she is a U.S. citizen) Gifts covering another person’s medical expenses and you make the payments directly to medical service providers Gifts covering another person’s tuition expenses, and you make payments directly to the school. (Payments for room and board, books, and supplies don’t qualify for this exception, but you can cover those costs by making a direct gift to the student under the annual exclusion.)
If you make a taxable gift (one in excess of the annual exclusion), you must file Form 709: U.S. Gift Tax Return. The return is required even if you don’t actually owe any gift tax because of the $1 million lifetime exemption. The return is due by April 15 of the year after you make the gift—the same deadline as Form 1040. If you extend your 1040 to October 15, the extended due date applies to your gift tax return too. For more information, see IRS Publication 950: Introduction to Estate and Gift Taxes. You can find these documents on the IRS website at www.irs.gov.
The Money Mom
