Ronald Lipman: Give away a bundle without tax liability
Published 6:30 am, Monday, February 7, 2011
Q: What is the maximum amount of money I can give to each of my children during my lifetime without incurring a tax liability?
A: During your lifetime, you can give away as much as $5 million without having to pay any gift tax.
In addition, you can also give any person as much as $13,000 each year without any gift tax consequences. This dollar amount is known as the annual exclusion. It is indexed for inflation and increases in $1,000 increments every few years. If you are married, the amount you and your spouse can give to each person doubles to $26,000 since the person receiving the gift can receive $13,000 from each spouse.
Gifts can be in the form of cash, stocks, bonds, real estate or anything else of value. Buying real estate, stocks or bonds in someone else's name is the same as making it a gift. The value of the gift would be the amount of money you spent to buy the asset.
You also can make school tuition payments for any person you choose, and these payments do not count toward the $13,000 annual limit or the $5 million lifetime limit. Payments you make for others' medical expenses don't count against those limits either. But be sure to pay the school, hospital or doctor directly. A check made payable to a person counts as a taxable gift, even if it is used for tuition or medical care.
If you give more than $13,000 to any one person, to the extent your gifts exceed $13,000 each year, you will use up a portion of your $5 million lifetime exemption. By way of example, if you give one of your children $43,000 this year, you can exclude the first $13,000 under the annual exclusion, and the other $30,000 will leave you with a remaining lifetime exemption of $4.97 million.
Keep in mind that if your gifts to any one person exceed $13,000 during a single calendar year, you will be required to file a gift tax return by April 15 of the following year. That's how the Internal Revenue Service keeps track of how much of your $5 million lifetime exemption you have used. Once you have given away more than the $5 million lifetime limit, you must start paying gift taxes — 35 percent under current law.
As far as income taxes are concerned, the general rule is that the recipient of a gift is not required to pay income taxes on the amount received. Certain exceptions, however, apply to gifts made at death. For instance, if a child is the beneficiary of your individual retirement account, that child will be required to pay income taxes on the amounts received.