Gift Tax Exemption Should Increase to $12,000 in 2006
There is good news next year for those who are wealthy, or just plain generous. The gift tax exemption, now set at $11,000 (per donor, per recipient, per year) will increase to $12,000 on January 1, 2006.
The gift tax exemption amount was stuck at $10,000 for years until it was indexed to inflation in 1998. That number rose by $1,000 in 2002, and next year another similiar increase will be mandated. That means those individuals who have been giving $11,000 per year to each child, for example, should now consider whether to increase that amount. Married couples will be able to give away $24,000 without paying tax.
Note that the gift tax exclusion amount is calculated for each recipient. Thus, if a particularly generous parent wanted to give $55,000 to her five children this year, she would be able to make a total of $60,000 in gifts in 2006. In fact, she could give another $12,000 to each of the children’s spouses, and another $12,000 to each grandchild.
Several other aspects of the gift tax exclusion are often misunderstood. First of all, the exclusion is not the government’s way of saying you are not permitted to make larger gifts. In fact, if over your lifetime the amount you give in excess of the exemption amount does not add up to another $1,000,000 you will not pay any gift tax at all. You will have reduced your estate tax exemption amount, and you will have had to file a gift tax return, but you will not have incurred any additional tax.
Another common misunderstanding: your gifts (of any amount) will not have any direct effect on either your or the recipients’ income taxes. Gifts are not deductible to you, and they are not taxable income to the recipient (not that this generalization may not be exactly accurate if you pay more than half of the expenses of your recipient; you may be able to at least claim the recipient as a dependent).
Another little-known quirk in the gift tax law: direct payment of medical or educational expenses will not get calculated as part of the $12,000 limit. In other words, you can pay a grandhild’s private school tuition, or college expenses, and still make another $12,000 gift (after the first of the year, of course). You can pay your father’s nursing home expenses without having to worry about gift tax consequences. But this rule does require that you make the payments directly; you should not give your grandson $40,000 and make him promise to use it for tuition – you need to write the check directly to the college he will be attending.
Another common confusion: the gift tax and the estate tax are no longer closely coupled. While lifetime gifts of over $1,000,000 will be taxed, an estate of $2,000,000 can be passed to heirs without taxation beginning in 2006.
Source: Elder Law Issues, Volume 13, Issue 14.