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Nature of Gifts and Applicability of Gift Tax
Unlike income taxes, the federal gift tax applies to donors of gifts, not the recipients. Because of the interrelationships among the gift tax, generation-skipping tax, and estate tax, the assistance of a knowledgeable estate-planning expert is important, particularly for multimillion-dollar estates and for couples who have remarried and have children from earlier marriages. The following summary is limited and is not a substitute for individual tax and estate-planning advice.
A “gift” is the transfer of value by a donor that is not in exchange for something of at least equal value from the recipient. Thus, a transfer to or on behalf of an employee in exchange for labor cannot ever be treated as a gift for tax purposes. Excluded from federal gift tax are gifts to charity, to political organizations, to spouses who are U.S. citizens, and for medical or educational expenses that are paid directly to medical or educational institutions, as well as gifts within the annual exclusion or lifetime unitary estate and gift tax exclusion ($3.5 million in 2009). Gifts within three years of the death of the giver are part of the gift-giver’s estate. Note that different rules apply to gifts of future interests and gifts to spouses who are not U.S. citizens.
Gift Tax Law Uncertain at the Beginning of 2010
The federal estate and gift tax provisions are in flux as of this writing (January 2010). This is because the Bush-era law in effect from 2001 through 2009—which, among other things, lowered the estate and gift tax rates—expired on December 31, 2009 and, contrary to most expectations, the Senate took no action on estate and gift tax legislation before the end of the year.
House Bill H.R. 4154, which passed in the House in early December, would have extended the 2009 estate and gift tax rates for years after 2009. But the absence of definitive Congressional action before the end of 2009 has resulted in a reversion to pre-2001 law. (See http://www.dvanarelli.com/blog/?p=4745 for a reprint of an article from The Earth Times describing the House bill.)
The legislative process for a new law may begin anew in the 2010 legislative session. It is anybody’s guess what, if anything, Congress will do in 2010 to remedy a current tax situation that probably is not satisfactory to any political faction: Under current law there is no estate tax in effect for deaths in 2010 but for years after 2010, the estate and gift tax rates increase.
2009 and Current Gift Tax Provisions
The tax rate for taxable gifts in 2009 was the same as the inheritance tax rate—that is, 45%. Barring legislative action to prevent the reversion to pre-2001 law, the gift tax rate decreases to the highest individual income tax rate (35%) in 2010. In Internal Revenue Bulletin 2009-50, released November 9, 2009, it was announced that the 2009-level annual exclusion would be retained for gifts made in 2010. Thus, in order for a gift-giver to qualify for the annual federal gift tax exclusion in 2009 and 2010, a gift from a single taxpayer to a single recipient cannot exceed $13,000 in a single tax year. A married couple can give a single recipient up to $26,000 without paying any gift tax. The annual exclusion is indexed to inflation, so it may increase in future years.
Gifts during 2010 above the annual exclusion amount apparently fall within a new lifetime gift tax exclusion of $1 million (which replaces a unitary gift and estate tax exclusion effective through December 31, 2009, of $3.5 million). In 2011 and beyond, the estate tax will be reinstated with a $1 million unitary estate and gift exclusion. The maximum tax rate for both estate and gift tax purposes will be 55%, plus a 5% surtax for estates between $10 million and $17.184 million. But this surtax is intended to eliminate the effect of marginal tax rates, so the result is an overall effective rate of 55%.
Because of the interrelationship between gift and inheritance taxes, it is extremely important for the gift-giver to keep detailed records of gifts among his or her tax records, even if the gifts are subject to an exclusion. For more information on federal gift taxes, see IRS Publication 950 Introduction to Estate and Gift Taxes. For a June 2009 article by the law firm McDermott, Will & Emery on the current estate and gift tax situation plus various earlier proposals, political positions, and issues, see Legislation Affecting Federal Estate and Gift Tax.
State Gift Taxes and Basis
Most states do not have gift taxes, but a donor living in Connecticut or Tennessee, for example, must look to state law to determine the applicable annual and lifetime thresholds for state gift tax purposes. While many states (North Carolina, South Carolina, Delaware, Louisiana, and New York, to name a few) have repealed their gift tax provisions in the past decade, recent and severe state budget deficits may result in the reinstitution of the gift tax in the future.
The recipient’s basis in a non-monetary gift is the basis of the donor in the gift, so a gift of precious metals, for example, may require the recipient to pay significant capital gains taxes on their sale. The gift tax, however, is paid by the gift-giver, not the recipient.
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