The current gift- and estate-tax rules are the following: If you die this year, $5.12 million of your estate is exempt from federal estate tax. An estate worth more than the $5.12 million is taxed at a flat 35 percent; that also is the gift-tax rate on lifetime gifts that exceed the exemption, according to Isdaner & Company L.L.C., certified public accountants based in Bala Cynwyd.
The rules scheduled to go into effect in 2013 are the following: If Congress does nothing to extend the so-called (President George W.) Bush-era tax cuts, we will go back to the tax regime that was in effect before the cuts were enacted. That means a much lower $1 million estate- and gift-tax exemption, and a much higher maximum estate and gift tax rate of 55 percent. If you are a person of means, or potentially set to receive a financial gift from a person of means, this could really take the fun out of giving.
By systematically giving gifts that qualify for the exclusion, you can gradually reduce the size of your taxable estate over time - no matter what Congress does or doesn't do.
However, here is the basic premise behind gifting now:
Under the current annual gift-tax exclusion, you can give gifts of cash or property (cars, land, shares of stock and other investments, even derivatives, as we've written in a previous column) to an unlimited number of recipients up to the specified amount - without any gift-tax consequences. Those recipients can include anyone - children, grandchildren, your favorite charities or other people and causes you deem worthy.
The annual threshold amount is $13,000 for transfers in 2012, and the Internal Revenue Service recently increased the threshold amount to $14,000 for 2013.
In sum, you can give a single recipient cash or property valued at up to $13,000 in December this year and $14,000 more in January 2013 completely free of gift tax. The annual exclusion is doubled for joint gifts made by a married couple. For instance, a couple could give a child $26,000 in December and a further $28,000 in January with no gift tax due.
If you are thinking about year-end gifts, don't wait until the last minute. If you make a financial gift by check, make sure it is delivered and deposited by the lucky recipient by Dec. 31, 2012, to qualify for your 2012 annual exclusion. However, the check can be paid by your bank in 2013, according to Isdaner & Co.
Finally, there are two other ways you may be able to give gifts without paying any gift tax, no matter what your tax bracket:
Medical expenses. No gift tax is imposed on amounts used to pay another person's medical expenses. Just pay the bills directly to the health-care provider.
Education expenses. No gift tax is imposed on amounts used to pay tuition and related fees on behalf of another person (notice it can be a child, grandchild or even a non-relative). Make out the checks directly to the educational institution and you're covered.
Both types of gifts can be made free of gift tax, and they are in addition to gifts covered by the annual gift-tax exclusion ($13,000 in 2012 and $14,000 in 2013).
Contact Erin Arvedlund at 646-797-0759 or firstname.lastname@example.org. Previous columns are at philly.com/arvedlund.