Not a millionaire? Better study gift tax rules

Not a millionaire? Better study gift tax rules

by Jason Alderman

September 17, 2010

Millionaires can probably skip this column. Most likely they've already got a team of financial professionals advising them about the best ways to pass along their wealth. For the rest of us, however, a quick refresher course on how the IRS treats gifts might prove helpful.

Separate from inheritances you might leave in your estate, you're also allowed to make gifts of up to $13,000 per year per person to an unlimited number of people before potentially triggering the federal gift tax. (Married couples who file jointly can together give $26,000 per recipient.) These limits are periodically adjusted for inflation. You must file a Gift Tax Return (IRS Form 709) for any gifts that exceed these amounts.

This doesn't mean you'll necessarily ever have to pay a gift tax, however. You are allowed to bestow a total of $1 million in gifts during your lifetime above and beyond the annual $13,000 excluded amounts before the gift tax kicks in, which for most of us means never.

Also not counted toward the $1 million lifetime exclusion are:

  • Gifts to your spouse
  • Direct payments you make for someone else's tuition or medical expenses
  • Charitable contributions
  • Gifts to qualified political organizations, such as political parties, election campaign committees and political action committees (PACs).

Note that to qualify for the $13,000 annual exclusion, your gifts must be of "present interest" – that is, there are no restrictions on the recipient being able to use the cash or property immediately; otherwise, they count toward the $1 million lifetime exclusion.

Rules for gift and estate taxes are complex, so read IRS Publication 950 at www.irs.gov for more details. Adding further complexity, the gift tax rate for 2010 was reduced to 35 percent from 45 percent in 2009. But Congress could well raise it in 2011. You'd be wise to consult a financial planning professional. If you don't have one, the Financial Planning Association (www.financialplanningassociation.org) is a good place to start your search.

Another way parents, grandparents and others can share their resources is by contributing to a 529 Qualified State Tuition Plan to fund children's education. Contributions up to the $13,000 annual limit ($26,000/couple) will not trigger the gift tax. Alternatively, you can jump-start the account by making a one-time contribution of up to $65,000 ($130,000/couple), as long as you don't make any other gifts to that beneficiary for five years.

There are two types of 529 Plans:

  • Prepaid tuition plans, where you prepay and lock-in future tuition at rates currently charged by in-state colleges.
  • College savings plans, where you contribute to an account whose interest earnings grow tax-free until withdrawn to pay for eligible expenses at any college or university.

To learn more about 529 Plans including tax implications, brokerage fees, investment risk and the potential impact on needs-based financial aid, read the guides at FinAid (www.finaid.org/savings/529plans.phtml), the Securities and Exchange Commission (www.sec.gov/investor/pubs/intro529.htm) and Chapter 9 of IRS Publication 970.

It goes without saying that before making such gifts, make sure you're on track to fund your own retirement, have adequate health insurance, can pay off your mortgage and are otherwise debt-free. You wouldn't want to deplete your resources and then become a financial burden on others.


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