04 Nov 2008

Making Gifts to Family Members Can Save Taxes

Tax Analyst from the Tax & Accounting business of Thomson Reuters Explains How

New York, NY, Fourth Quarter, 2008 – Whether or not a child has a need for funds, an individual with sufficient means should consider making gifts to family members for tax savings. “Gift giving can save federal and state death tax and, in some cases, family income tax and it’s easy to set up gifts so that no gift tax will be payable,” says Anne Wagenbrenner, a tax analyst for the Tax & Accounting business of Thomson Reuters.  More and more individuals are helping their children during their lifetimes, as opposed to passing on their assets at death. This makes sense for many reasons—for instance; a child may need funds now for a down payment on a home, starting a business, tuition, or medical expenses. 

Year-end: Ideal time to make gifts. By the end of the year, you have a clear picture of your overall finances and how much you can afford to give away. You can give $12,000 ($24,000 if your spouse joins in making the gift) to an unlimited number of individuals without paying gift tax. Using this tax benefit, which is called the “annual exclusion,” can save estate tax because the cash or assets that you give away, plus the growth in value of the assets after you gift them, is taken out of your estate at no transfer tax cost.

This year, $2 million is exempt from federal estate tax. This jumps to $3.5 million next year. “Don’t let these numbers fool you,” says Wagenbrenner. “They may seem substantial, but when you add up the value of your home, retirement accounts, savings, investments, life insurance, and other items, you may be surprised to find out that you are not beyond the reach of estate tax. Also, state death tax exemptions may be lower than the federal exemption.”

No carryover. You cannot carry over any unused gift tax annual exclusions to the next year, so if you plan to use your annual exclusion to make a gift to a particular individual this year, be sure to “complete” the gift this year. This usually doesn’t pose a problem except when a gift is made via personal check late in December. In that situation, instruct the gift recipient (“donee”) to deposit it before year-end and, ideally, early enough to clear before next year.

Tuition and medical gifts. You can make unlimited payments of another person’s medical expenses or tuition; these payments are not taxable gifts. The payments must be made directly to the medical provider or the educational organization.

Unlike such direct payments, however, contributions to tax-favored qualified tuition programs and Coverdell education savings accounts don’t qualify for this unlimited tuition exclusion. Instead, they are treated as gifts that qualify for the gift tax annual exclusion, with the option of spreading contributions in a single year over a five-year period.

Income tax savings. Sometimes, gifts will save the family income tax. For example, suppose the gifted property yields income. Savings can be realized here if the donee is in a lower marginal bracket than the donor. If the donee is age 23 or under, the so-called kiddie tax rules may kick in to prevent income tax savings.

“With gifts, there is ample opportunity for tax breaks,” says Wagenbrenner. “With careful planning, you can find ways to give gifts to family members and save tax or build equity at the same time.”

 

About Thomson Reuters

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The Tax & Accounting business of Thomson Reuters is the leading provider of technology and information solutions, as well as integrated tax compliance software and services to accounting, tax and corporate finance professionals in accounting firms, corporations, law firms and government. Tax & Accounting includes the Professional Software & Services, Corporate Software & Services, and Research & Guidance business groups.

Contacts

Melissa Lande
Lande Communications
Tel: +1 800 993 7600 (toll free in North America)
Email: mlande@landepr.com