Seems a little crummy, doesn't it? If you choose to give away the money you already paid taxes on, you'll have to pay taxes on it again in the form of a gift tax. You won't be taxed for all of your gifts, but in most cases you will pay taxes on the gift - at a minimum of 55% in 2013 if the Bush-era tax cuts expire. It might make you feel a little better to know that the lifetime maximum is currently $5.12 million, much higher than the average person will ever give. However, in 2013 the maximum could drop to $1 million. According to Reuters, there are at least 6 million households with more than $1 million making the gift tax a reality for more people than we might think. As you age and amass assets, you may find yourself considering gift tax rules. If you wait too long to prepare, it may be too late. Here's what you need to know about the gift tax.
Currently you can give up to $13,000 per year per individual. A household with two adults can give up to $26,000 per year for a maximum of $10 million. Anything above that is subject to a minimum gift tax rate of 35%. In 2013, the tax rate will go to a minimum rate of 55% unless Congress acts before the end 2012. Not all gifts are taxable. If you pay your child or grandchild's education expenses, those are tax-free gifts providing you pay directly to the school. You can also pay for a person's medical bills providing you pay directly to the doctor or hospital. You can gift to your spouse without the money being subject to a gift tax providing your spouse is a U.S. citizen.
Gift Vs. Estate Tax
The estate tax is a tax you pay to transfer property to somebody else after your death. Just like the gift tax, the estate tax is scheduled to drop to $1 million from the 2012 level of $5.12 million. According to Vanguard Investment Group, these taxes are unified. This means that if you gift $500,000 to somebody, that reduces the estate tax and gift tax exclusion both by $500,000.
Planning Your Estate
It may be true that the gift tax doesn't apply to you, but your entire estate may be worth in excess of $1 million once you reach retirement age or older. Although these maximums will adjust with inflation over time, your home and other high-dollar assets may add up to one day surpass the gift or estate tax maximums. If this happens, you may owe a lot more in taxes than you would have if you planned for the event. Because of that, you should meet with an estate planner to develop strategies that can help to reduce your tax bill once you pass away.
The Bottom Line
The decrease in the gift tax maximums goes along with the increase in other taxes that comes from the expiration of the Bush-era tax cuts set to expire at the end of 2012. Most experts believe that Congress will vote to extend the tax cuts for at least one year, but with the recent Congressional gridlock as well as it being a presidential election year, there's no guarantees the extension will become reality. If the gift or estate tax rules currently affect you, meet with a tax or estate planner this year so you're prepared for what would be the worst case scenario.