Here at the Daily Deduction, we usually write about the income tax. Today, however, is a gift tax day. The gift tax, a less famous cousin of the widely unpopular estate tax, applies to transfers of over $12,000. The tax, at 45% this year, is paid by the giver rather than the receiver. How's that for generosity?
Of course, in an economy like this one, very few of us are in the mood to give such large gifts. Why worry about the gift tax then? It's a very useful way to plan for the estate tax.
The gift tax and the estate tax have the same high rate. Gifts of less than $12,000 are exempt under both, but there's a catch: You must be living to make a tax-exempt gift. Any money you don't give away before you die may be subject to the estate tax. For those of us who inherited retirement funds from our parents, who own family farms, or who run small businesses, the estate tax could put a serious dent in our family's future security.
(And yes, the estate tax will expire in 2010, but any betting tax lawyer would be tempted to put money on its resurrection.)
One great way to make sure that the government doesn't take half of everything you own when you die is to give things away while you're still living. You can give up to $12,000 away to each of your loved ones without incurring any gift tax at all, and your spouse can do the same. Not only will you avoid the gift and estate taxes, but your chosen recipient won't have to pay any income tax on the gift.
So it's your choice: Give $12,000 to Junior now, or wait too long and give almost 6,000 of those dollars to Uncle Sam instead.
If you want to make a larger gift, never fear. The tax law provides a credit, called the "unified credit," that will cover your gift tax bill. In fact, you can make up to $1 million of taxable gifts during your lifetime or after death and never pay a cent of tax of gift tax or estate tax. There's a catch though. The same unified credit applies to both taxes. So if you use the unified credit to make tax free gifts during your life, your heirs may wonder what to do with the huge estate tax bill they receiv after your death. Of course, it goes without saying that if you're worried about the unified credit, you should talk to a tax lawyer before that last Big Mac catches up with you (Stock Quote: MCD).
Last, but not least, some gifts are never taxable, no matter what the amount. These include gifts to your spouse, tax deductible gifts to a charity, and medical bills or college tuition that you pay for another person. So go ahead, perform that act of kindness that you've been considering. Not only will you help a loved one now, but you may pay less tax later.
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