Under our current tax laws, the maximum tax exemption a person can claim during his lifetime for a gift is $5.12 million ($10.24 million for a married couple). There is generally a $13,000 annual gift-tax exclusion which does not count towards the lifetime maximum amounts, however, if a person gifts any amounts over $13,000 in a year, such amounts will be subject to a 35% tax rate and will count towards the lifetime maximum amounts.
Some helpful tips on how to make the best out of your $13,000 annual gift-tax exclusion:
If you are a married with children, both parents can annually donate up to $13,000 per child. For example, if Mary and Joe have two children, Ben and Sam. Mary can gift $13,000 to Ben and $13,000 to Sam. Joe can also gift $13,000 to Ben and $13,000 to Sam.
When both spouses may not be in accord as to each gifting the $13,000 annual maximum exclusion, a procedure called gift splitting is used. Gift splitting allows one spouse to gift up to the $13,000 limit and double up that gift on behalf of the other spouse. Taking the example above with Mary and Joe, if Joe is not a position to gift his $26,000 total to Ben and Sam, Mary may gift up to $26,000 to Ben and $26,000 to Sam. In order to properly account for this gift, Mary would have to file IRS form 709, and Joe would have to sign it acknowledging his wish to exhaust his annual gift exclusion. Thereafter, these amounts would be tax-free and would not count towards the $10.24 million lifetime maximum.
Larger gifts above the $13,000 limit can be split among spouses towards the lifetime maximum of $10.24 million. Taking our example, if Mary wishes to gift $50,000 to Ben and $50,000 to Sam, $26,000 will count for her annual exemption and $24,000 will count towards her lifetime's maximum, Joe can also do the same. The results are that the whole $100,000 amount will be tax-free with each spouse having their lifetime maximum's reduced by $24,000 after proper tax forms are filed.
See Donald Jay Korn, "Tip for Doubling Your Annual Gift-Tax Maximum" www.news.investors.com, (Jan. 6, 2012).
Posted By EJ Antezana, Associate Editor, Wealth Strategies Journal
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