The payment of a gift tax is a rarity. There are a number of reasons for this. Most gifts qualify for the $10,000 annual exclusion or for the marital or charitable deduction. Thus, most gift tax plann
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RULES ALLOWING YOU TO AVOID GIFT TAXES
There are some basic gift tax rules that result in the payment of a gift tax being so rare:
- A person who wants to make a gift can give any person he or she chooses up to $10,000 per year, without having to report the gift or pay a gift tax.
The gift must be an outright transfer with no strings attached to qualify for this annual exclusion.
Gifts in trust are subject to special rules before they can qualify for the exclusion. Most gifts are covered by the $10,000 annual exclusion. The number of $10,000 annual exclusions one donor can use is limited only by the donor's largesse. In addition, annual gifts in excess of $10,000 are not subject to the gift tax if they are paid directly for the donee's tuition or medical expenses. Consider these examples:
Each year each of them can give $70,000 ($10,000 to each of their children
and $10,000 to each of their grandchildren), for a total of $140,000. Each of them can make these separate gifts without having to file a gift tax return or pay a gift tax.
Most people are aware of the favorable income tax treatment for gifts to charities. Few think about the gift tax consequences when they make annual donations. Most gifts to charities qualify for the charitable gift tax deduction and do not result in the payment of a gift tax. Sometimes a gift tax return is required to be filed. Some donors employ trusts to either pay the income or a remainder interest to a charity.
These trusts require significant planning and tax knowledge.
Gifts that exceed or do not qualify for $10,000 annual exclusion and that do not qualify for the marital or charitable deduction are considered "taxable gifts." Only taxable gifts can generate a gift tax. However, a gift tax will not be due until a donor makes taxable gifts totaling more than $600,000 during his or her lifetime. This $600,000 amount is a cumulative lifetime "exemption".
The mechanics of this rule are very technical -- in fact, the $600,000 "exemption" actually results from a tax credit of $192,800. Most donors rarely make such a large gift in any one year. In fact, most donors do not make total taxable gifts over their lifetimes of $600,000.
Because of all of these rules, gift taxes are rarely required to be paid.
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