Plan carefully and you can reduce your estate’s tax liability and help those dear to you by giving them some of your money. Give haphazardly and you are likely to fall prey to the gift tax. The IRS assesses it when your generosity exceeds the limit the U.S. tax code establishes each year. Besides becoming acquainted with the rules in this tax matter, it is helpful to consult a financial planner for expert advice.
The Gift Tax
The maximum amount of cash you can give away tax-free may change from year to year. Start by consulting the IRS or its website to find out what the cap is for a given year. In 2011, for example, tax-free gifts were capped at $13,000. You may give money to your spouse that exceeds the cap without incurring the gift tax. In addition, if you gave away $13,000 in cash in 2011, you might have had to pay the gift tax if you also passed some of your real estate property to another. For purposes of assessing the gift tax, the IRS considers a gift the transfer of tangible and intangible personal and real property. Since exceptions to this rule also apply, it is worth talking to a tax accountant.
Gift Tax Rates
Based on 2011 figures, the most you pay in gift taxes is equal to 35 percent of the taxable cash you give away. The top rate applies when the taxable amount of your gift is over $500,000. On the lowest end of the gift-tax table, you owe the IRS 18 percent on taxable figures under $10,000. Roughly, the gift tax accrues in 2 percent increments of the taxable amount of your offering. The gift tax table may also change, and you should verify it with the IRS every year you give money away.
Avoiding the Gift Tax
You may give away more money than the tax code allows, while avoiding the gift tax, when you pay medical providers directly for services rendered to someone else. Likewise, you are exempt from the gift tax when you pay academic institutions directly for a student’s education.
A Tax-Free Advance Gift
A 529 plan is a tax-deferred tuition program the IRS regulates that allows you to invest money to pay for someone’s college tuition. While there is no limit to how much you may contribute to a 529 account, your deposits are subject to the gift tax if they exceed the maximum you are allowed to give away in a given year. But under a 529 plan, you may also make up to five years' worth of deposits in the same year without owing the gift tax. In 2011, for example, you could have added $65,000 to a 529 account. If you choose this option, you cannot make any more contributions for the following five years. But the hefty lump sum has the potential to accrue high earnings quickly.
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