Giving money away can be complicated if you don’t know the tax laws. If you’re planning to make a significant financial gift to a child or grandchild in 2010 it’s important to fully understand the gift tax rules to ensure the IRS does not become one of your recipients.
Here are five important facts you should know before you make a sizable gift in the New Year.
1. The annual gift tax exclusion amount will remain at $13,000 for 2010. The annual gift tax exclusion is the amount that a person may gift to another individual in a calendar year without gift tax consequences. For example, if you have three children and you want them to fully benefit from the annual exclusion, you may give each of them $13,000 during the 2010 calendar year for a total of $39,000. The amount of the annual exclusion is indexed for inflation and is revised each January when appropriate.
2. You would have to make excess gifts of more than $1 million during your lifetime before you would owe any gift tax. If you give any one person more than the allowable annual exclusion in any calendar year, you have made an excess gift. The law allows each person to make cumulative lifetime excess gifts of up to $1 million before there is any gift tax due. However, excess gifts will reduce your so-called unified credit, which is the amount that passes free of federal estate tax upon death.
3. It not necessarily a bad idea to make a gift in excess of the annual gift tax exclusion. Many people believe that under no circumstances should they make a gift in excess of the annual exclusion amount. This is not the case. As noted above, excess gifts will reduce the amount that a person may leave free of federal estate tax; however, that amount - currently $3.5 million – is fairly sizable. Therefore, if the taxable estate of the person making the gift is less than $3.5 million, the excess gift will have no impact on the estate taxes payable at their death.
For example, if a parent gives a child a gift of $113,000 in one calendar year, the parent has made an excess gift of $100,000. This excess gift will reduce the amount the parent can pass on free of the federal estate tax, from $3.5 million to $3.4 million. If the parent’s taxable estate is $2 million, the excess gift of $100,000 is irrelevant because the estate is not subject to the federal estate tax
4. The gift tax is federal only; there is no Massachusetts gift tax. Massachusetts does not impose a gift tax regardless of the amount given away. Further, even though the Massachusetts estate tax is based on the federal estate tax (with a $1 million exemption from estate tax rather than $3.5 million), excess gifts will not affect the amount of Massachusetts estate tax liability.
5. When you give a gift, it is not taxable income to the recipient nor is it tax deductible by the giver. Many people are under the impression that giving a gift in excess of the annual exclusion amount means the excess amount will be income taxable to the recipient. Regardless of the amount that you give, or receive, a gift is neither income to the recipient nor deductible by the giver, unless the gift is made to a qualified charity, which will be discussed in a future column.
If you’re in a position to give a gift in the months ahead, make sure your money ends up exactly where you want it to go. As with all estate planning matters, consult an experienced, qualified attorney to ensure your wishes are carried out.
Attorney Suzanne Sayward is president of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA), and is a partner with the Dedham firm Samuel, Sayward, Baler LLC. For more information about gifting and the gift tax, visit www.ssbllc.com.