The Fundamentals of the Gift Tax

Without knowing about the gift tax exclusion, you may have to pay a large gift tax to the IRS. In 2011, you don’t have to pay any gift tax if you give up to $13,000 to any number of beneficiaries. Generally, the gift tax is to be paid by the giver of the gift so beneficiaries don’t have to pay income tax for the gifts.

If you plan to give above the exclusion amount of $13,000 a year, you should know that you can give above that amount up to a maximum of $5 million over your entire lifetime without having to pay a gift tax. This may sound a little confusing so it’s best to illustrate the gift tax exclusion with some simple examples. If you decide to give a lump sum of $8 million to a person, this amount exceeds the lifetime amount of $5 million by $3 million. In this case, you have to pay a gift tax for the $3 million. Depending on your income tax, the gift tax can be up to 35 percent.

In another scenario,

You decide to give $10,000 to 800 people in a calendar year. A simple calculation shows that you are giving away $8 million. How much gift tax do you think you will have to pay? Not even a penny. Why? Since the amount of $10,000 is below the gift tax exclusion of $13,000 in 2011, you don’t owe any gift tax at all! As long as you are not giving more than $13,000, you don’t have to worry about any gift tax, and even if you exceed the amount, you can actually give up to $5 million without paying any tax.

Let’s assume that you want to give $18,000 to 100 people in 2011. This means that you are exceeding the $13,000 limit by $5,000 and when you multiply the amount by 100, you will see that you have exceeded by $500,000. This $500,000 is not taxable because it’s less than the $5 million lifetime exclusion but it will be counted against it, which means that your new lifetime exclusion amount is now reduced to $4.5 million unless the lifetime gift tax exclusion is raised in the future.

Now that you know how the gift tax works, it’s useful to understand the definition of a gift according to the IRS. If any property is transferred from one person to another for below its full value, it’s considered to be a gift. As mentioned earlier, any gift which does not exceed $13,000 in 2011 is not taxable. Other gifts which are not taxable include charitable gifts, gifts for educational expenses, gifts of medical expenses, and more. In the case of gifts for spouse, the annual limit for foreign spouses in 2011 is $136,000. If you have more questions about gift tax, it’s best to contact a professional tax adviser.