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Reducing Estate Tax by Making Gifts
Making gifts during your life can provide you with tax savings and more.
NOTE: The federal gift and estate tax is being phased out, but its ultimate fate is still a hot political question.
While the estate tax is still in effect -- or if Congress resurrects it after it goes away as scheduled in 2010 -- you may want to take steps to reduce possible estate tax liability at your death. One way to avoid estate tax is to give away property during your life. This provides you with more than just tax savings; you also get to see the recipients enjoy your gifts.
Currently, you can make an unlimited number of $12,000 gifts of cash or other property each year, completely tax-free. To ensure these tax savings, you need remember only that no individual recipient can receive more than $12,000 in a calendar year. If you left the same gifts at your death and they were subject to estate tax, the recipients would see their gifts shrink by at least 39%.
How the Annual Exclusion Works
The $12,000 annual tax exemption rule (called the "annual exclusion") is pretty straightforward. For instance, if you give $25,000 to someone, $12,000 of it is exempt from gift tax. The remaining $13,000 is not. A few more examples:
- You give $8,000 to a cousin in one year: There are no federal gift tax consequences.
- You give $16,000 to your grandson in one year: $4,000 is subject to gift tax.
- You give $8,000 each to your two children: None of that $16,000 is subject to gift tax.
The exclusion amount is indexed for inflation; it rises, in $1,000 increments, as the cost of living does.
Couples: Double Your Exclusion
Couples can combine their annual exclusions, meaning that they can give away $24,000 worth of property tax-free, per year, per recipient. In fact, even if only one spouse makes a gift, it's considered to have been made by both spouses if they both consent. (IRC § 2513.) If you and your spouse give to another couple, you can transfer up to $48,000 tax-free each year.
FAQs
- The law allows me to leave everything to my spouse tax free, right? How can we use that to our children's maximum advantage?
- I'm the owner of a business, and I understand that my estate would have to pay taxes on the value of the business if I don't do anything—but what can I do to lighten the tax load?
- What if I receive a bequest and don't want it?
- What about state death taxes?
- I'm not rich. Do I have to worry about federal estate taxes?
Estate Planning Resources
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