By NEIL DOWNING
The Providence Journal
20-OCT-05
Q: A while back you printed an article in regard to being able to leave at least $11,000 to your children or some relative tax-free. Would you mind (listing the) specifications of when can you do this? Do you have to wait until the end of the year? Do my children have to report this money? Do I have to report that it was
taken out of my account?
B.F., Providence, R.I.
A: The general rule says that if you give someone money or other property, you may be subject to the federal gift tax.
As a practical matter, however, you needn't worry. For instance, gifts that you make to your spouse _ no matter their size _ generally don't trigger gift-tax consequences.
What about gifts you make to someone other than your spouse _ such as a relative or a friend? In general, there are no gift-tax consequences _ provided that the value of the gifts you make to that person for any given year doesn't exceed the "annual exclusion amount" for that year. In other words, the value can't exceed a certain dollar limit.
For 2005, the dollar limit is $11,000. So if you give someone no more than $11,000 this year, you won't have to worry about federal gift-tax consequences, said Patricia A. Thompson, head of the Rhode Island Society of Certified Public Accountants' federal and state tax committee.
The recipient "doesn't have to be related" to you _ the rules are the same, Thompson said in an interview at Piccerelli Gilstein & Co. LLP, a CPA firm in Providence, where she is tax partner.
A separate annual limit applies to each recipient. So, to avoid triggering federal gift-tax consequences this year, you may give up to $11,000 to your son, $11,000 to your daughter, $11,000 to your neighbor and $11,000 to your friend.
If you're married, the annual dollar limit is twice that for a single person, so it's $22,000 for 2005.
Now let's focus on the specific questions you raised in your call to Moneyline:
Do you have to wait until the end of the year? No. You may make one or more gifts at any time. Just take care that the combined value of gifts you make to someone in any given year doesn't exceed the annual dollar limit for that year. Remember, too, that the limit can increase in any given year based on inflation. It's $11,000 this year, but several tax experts predict that it'll increase to $12,000 for 2006. (The Internal Revenue Service is scheduled to publish the official figure soon.)
Do my children have to report this money? No. It's a gift; there are no income-tax, gift-tax or estate-tax consequences to them. The IRS, in a booklet it publishes on this subject, says, "The person who receives your gift . . . will not have to pay any federal gift tax or estate tax because of it. Also, that person will not have to pay income tax on the value of the gift or inheritance received."
Do I have to report that it was taken out of my account? No, although in some cases you may have to file a federal gift-tax return.
Here are a few other points to keep in mind:
If you have a lot of assets, and you're planning your estate, making gifts within the limits described above can be an effective way to reduce the size of your estate for purposes of any federal estate tax that may be due upon your death. (Some states also have their own estate-tax systems.)
Even if the gifts you make exceed the annual dollar limits mentioned above, you still probably won't have to worry. That's because, in general, each person has a lifetime limit before the federal gift tax kicks in. For most people, the limit is high enough to shelter up to $1 million in lifetime gifts.
So suppose you're single and you give your daughter $12,000 this year _ $1,000 above the "annual exclusion" amount mentioned above. What happens to that "extra" $1,000? In effect, it simply reduces your $1-million lifetime limit.
Some gifts aren't counted against either the annual dollar limit or the lifetime limit: someone's tuition expenses that you pay directly to the educational institution; someone's medical expenses that you pay directly to the hospital; gifts to political organizations; and gifts to charity.
TODAY'S TIP: There are lots of rules governing the federal gift tax, too many to list here. For more information _ including details on when a federal gift-tax return must be filed _ see IRS Publication 950, "Introduction to Estate and Gift Taxes," a plain-language booklet that I've recommended to readers in the past.
For your free copy, visit your local IRS office, call the agency toll-free at 1-800-829-3676, or use this Web site:
www.irs.gov/formspubs
(Neil Downing is the author of "The New IRAs and How to Make Them Work for You." E-mail questions to moneyline(at)projo.com or leave a message at 401-277-7484. No personal replies, but as many questions as possible will appear here.)
(Distributed by Scripps Howard News Service, http://www.shns.com.)
