Gifting and the IRS - Misconceptions
After years of incorrect understanding of gift taxes, today I did some research online and found a few interesting misconceptions and their correction. The definitive source online is the IRS site, with the relevant page located at:
IRS Gift and Estate Tax Overview
Misconception #1: The recipient of gifts over the exclusion limit ($12,000 per person in 2008) is taxed. This is not true, the only possible tax on gifts is born by the person giving the gift.
Misconception #2: All gifts are subject to the exclusion and possible taxes. Not true - gifts of tuition or medical expenses are excluded regardless of the dollar amount. Gifts to your spouse are also excluded.
Misconception #3: All gifts over the exclusion limit are taxed. This is not technically true, because of the Unified Credit in the tax code. This provision allows you to use some of the inheritance exemption while you are alive to avoid paying taxes on gifts that exceed the exclusion limit. You still have to fill out the gift tax form in your tax return, but you can use some of the Unified Credit to avoid paying taxes.
The Unified Credit is interesting. This allows you to time your inheritance to minimize the value of assets when transferred. Non-cash assets can be transferred anytime prior to death and still be part of the estate tax inclusion. Stocks, real estate, and other non-cash assets can be gifted when the market is down, reducing the overall size of the estate. By exceeding the $12,000 limit ($24,000 for married couples) you may have to fill out an extra form, but you do not necessarily trigger taxes. Instead, you might just lower the overall tax bill for your heirs.
2 Responses to “Gifting and the IRS - Misconceptions”
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Thank you!