Being generous to your family and friends can cost you if you fail to plan ahead. While they don’t owe any income taxes on money or property you give to them, regardless of amount, you as the “donor” may owe a federal gift tax. This is a tax on the gratuitous transfer of money or property (you don’t receive anything in exchange) and essentially is designed to ensure that well-heeled individuals will pay a transfer tax, whether they give away their wealth while they are alive or when they die. Here’s how the gift tax system works.
Not all gifts incur a gift tax. Small annual gifts aren’t subject to gift tax. These are gifts covered by the annual gift tax exclusion, which is a dollar amount that can be adjusted annually for inflation (for 2011, the exclusion is $13,000). This exclusion applies on a per-recipient basis, so you can give to 1, 10, or more individuals-your children, in-laws, friends or anyone else-gifts under the exclusion amount, year in and year out, and never trigger gift tax. Married couples can opt to make joint gifts, allowing a double exclusion for property in one spouse’s name.
Also, gifts you make to a school or health care provider to cover a recipient’s education or medical costs are never taxed, regardless of amount. Similarly, gifts to a qualified charity in any amount are fully exempt from gift tax.
Larger gifts, however, are potentially taxable. Starting in 2011 each person can give away in his or her lifetime up to $5 million (over and above any exclusion gifts) without inccurring gift tax. Gifts of property are measured by their current value, regardless of what you paid for them. When gifts become taxable (transfers exceed $5 million), tax rates of up to 35% apply.
Gifts exceeding the annual exclusion, as well as joint gifts by married couples and gifts to qualified tuition plans of up to five times the annual exclusion, must be reported on an annual gift tax return, Form 709. The return is usually due the same day as the personal income tax return (e.g., April 17, 2012, for reportable gifts made in 2011). If a donor died in the same year that the gift was made, then the return must be filed and any gift tax paid by the earlier of the donor’s final income tax return or the estate tax return for the donor’s estate. Obtaining an automatic filing extension for the income tax return also extends the deadline for the gift tax return-but not the deadline for any tax due (this remains April 15).
Approximately 51.5 million taxpayers have $3.5 trillion in assets in IRAs (including traditional IRAs, Roth IRAs, SIMPLE IRAs, and SEP IRAs). In 2005, for example, contributions totaled $57.4 billion and rollovers to IRAs were another $231.3 billion.
Source: Joint Committee on TaxationView all factoids