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.

The Details
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.

Related Articles
  1. Personal Finance

    The Ten Commandments of Personal Finance

    Here are the simple financial Ten Commandments that, when faithfully followed, can lead to a secure economic future.
  2. Professionals

    Common Interview Questions for Financial Auditors

    Identify questions commonly asked at financial auditor job interviews, and learn to formulate winning responses that give your candidacy a boost.
  3. Taxes

    Retired? 7 Tips for Cutting Taxes Before 2015 Ends

    As 2015 nears its end, here are some financial moves retirees can make before December 31 that can help to lower your tax bill.
  4. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  5. Professionals

    4 Must Watch Films and Documentaries for Accountants

    Learn how these must-watch movies for accountants teach about the importance of ethics in a world driven by greed and financial power.
  6. Investing Basics

    Do You Need More Than One Financial Advisor?

    Using more than one financial advisor for money management has its pros and cons.
  7. Taxes

    How & Where to File Form 1040 (And Which Version)

    All taxpayers need to know three things when filing a 1040: which form to use, how to file and where to file. After reading this, you'll know all three.
  8. Savings

    Should You Look at 529 Plans Outside Your State?

    529 savings plans are not restricted by geography. So if your in-state offering has high fees or poor investment choices, look elsewhere.
  9. Taxes

    The Purpose Of The W-9 Form

    The W-9 form provides key data your clients need if you're an independent contractor. Just be sure you're not really an employee who should fill out a W-4.
  10. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  1. Are estate planning fees tax deductible?

    Estate planning fees may be tax deductible, but only if certain conditions have been met. Internal Revenue Service (IRS) ... Read Full Answer >>
  2. Can personal loans be included in bankruptcy?

    Personal loans from friends, family and employers fall under common categories of debt that can be discharged in the case ... Read Full Answer >>
  3. Are personal loans tax deductible?

    Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
  4. Does a Flexible Spending Account (FSA) cover braces?

    Funds from a Flexible Spending Account (FSA) can be used to cover costs associated with installing, maintaining and removing ... Read Full Answer >>
  5. Does QVC charge sales tax?

    QVC, an American TV network, is registered with states to collect sales or use tax on taxable items. QVC is also required ... Read Full Answer >>
  6. Does a Flexible Spending Account (FSA) cover glasses?

    The funds in a Flexible Spending Account (FSA) can be used to cover most common medical expenses; this includes the cost ... Read Full Answer >>

You May Also Like

Trading Center