Starting with tax year 2009, there were several important changes in the federal tax code concerning the gift tax and the estate tax.
* Gift tax yearly exemption raised to $13,000
The gift tax is a tax paid by the giver (not the recipient) of a gift. It only kicks in for very large amounts, so most people will never have to pay a gift tax.
Prior to 2009, each year you could give a person $12,000 worth of gifts without it having any gift tax implications. Starting with the 2009 tax year, the yearly exemption was increased from $12,000 to $13,000.
Anything beyond that exemption is then added to a cumulative lifetime total. As long as that total does not surpass $1,000,000 (which did not change in 2009), there is still no gift tax.
For example, if you gave your, um, personal assistant $20,000 in jewelry in 2006, a $40,000 car in 2007, and a $800,000 home in 2008, $7,000 + $27,000 + $787,000 would count toward the lifetime gift limit, for a total of $821,000. Thus you would still owe zero in gift tax, since the total is still under $1,000,000.
* Estate tax exemption raised to $3.5 million
The estate tax truly does now affect only the wealthiest of Americans. Starting in 2009, any estate valued at $3.5 million or less (up from $2 million in 2008) has been exempt from the estate tax.
The exclusion is separate for a husband and wife, so couples can shield $7 million from estate taxes. Legal counsel is advised for drawing up wills and related documents here though, as that exclusion can be either $3.5 million or $7 million for a couple depending on the precise wording of how property is disbursed when one spouse dies.
* Generation skipping transfer tax exemption raised to $3.5 million
Some people prefer not to leave their money to their children if their children are already elderly themselves, as they don’t want that money to potentially be taxed twice-on the transfer to their children, and then on the transfer very shortly thereafter to their children’s children. So they skip the middleman and leave the money directly to their grandchildren.
Since 2009, this can be done with the same tax exemption of $3.5 million (up from $2 million in 2008) as the estate tax. Again with proper estate planning, this exemption can be $7 million for a couple.
For more information, visit www.irs.gov.