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Defining Gift Tax: Things You Should
Know
When you do something nice for someone, like giving them a
financial gift, the last thing you want is to be smacked in the
face at the end of a year with a tax bill for that money. Gift
tax is something many people overlook when they are helping out
their family and friends, and it can sneak up on you and land
you with a hefty fine, if you don't play your cards right. The
good news is that there are lots of ways to give financial
gifts without being subject to the gift tax and recent
increases to the limit for tax free financial gifts has made
this even easier.
First, let's clear up what exactly gift tax is. Gift tax is a
tax on money and valuables that you distribute to family and
friend over the course of your lifetime. There is a both a
yearly maximum amount of gifts and goods you can give someone
tax free, and a lifetime limit for financial gifts. The annual
limit is $12,000 in money and goods per person; that means you
can give $12,000 to as many people as you like without
triggering the gift tax. Over the course of a lifetime, you can
give as many individuals as you like a total of $2 million in
money and goods. This $2 million include money and goods given
in life combined the amount left in your estate. Anything above
that amount is taxable under the gift tax law.
When you give someone a gift above these amounts, it is you who
is responsible for the gift tax, not the recipient. If the
amount of money in your estate exceeds $2 million, and you have
left your estate to a single person, than the money is directly
withheld from your estate.
If you want to give more than $12,000 a year to a single
person, there are some ways to get around the gift tax. If the
financial gift is intended to pay for tuition, hospital bills,
rent, or living expenses, pay the institution directly rather
than giving the money to the individual to reimburse. If you
are married, than both you and your spouse are each eligible to
give $12,000 a year, so one of you can give a $12,000 gift, and
the other can give a gift for the remaining amount you wish to
give away. If the recipient of the gift is married, they and
their spouse can each receive $12,000 individually without
paying gift taxes, so make gifts to each of them separately. If
you want to save money for your child's college education, you
can pay up to $12,000 a year into a college savings account tax
free, without the entire account becoming subject to gift
tax.
If you must give a gift that exceeds $12,000 and there is no
way to avoid triggering the gift tax, don't panic. Merely
reporting the gift doesn't guarantee that you will be hit up
for money from the IRS. It is usually gifts in the hundreds of
thousands of dollars, which begin to actually cost the giver
some money. If you know that gift tax is going to be an issue
for you, plan wisely. Look for other deductions in your tax
bill. Make a charitable donation that can be a write off for
you, or determine if any of your business or living expenses
qualifies as deductions. When you are transferring large sums
of money and dealing with complicated issues like gift taxes,
getting a financial advisor involved will minimize your out of
pocket expenses and make sure you have gone about everything in
the correct manner.
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