Back in December, the law that’s become known as the Tax Relief Act of 2010 (TRA 2010) was signed. In addition to a new estate tax threshold, not to mention quite a list of other provisions, TRA 2010 made changes to the federal gift tax law. Here’s a quick look:
There are still two types of exemptions when it comes to the tax: the annual gift tax exemption, and the lifetime exclusion. They work together in determining whether you have to report gifts you’ve made during a particular year, as well as whether you’ll owe taxes on those gifts.
The Annual Exemption: For 2011, the annual gift tax exemption remains at $13,000. This means that each person can give gifts of up to $13,000 in value to as many individuals as he or she chooses during 2011, without reporting those gifts to the IRS, and without paying federal gift tax. If you’re married, you and your spouse can combine your exemptions and give up to $26,000 to each individual recipient. A gift in excess of this amount may or may not be taxable, but you will have to file a gift tax return to report the gift to the IRS.
A special note: If you’re married to a U.S. citizen, you can give an unlimited amount to your spouse tax-free.
The Lifetime Exclusion: If you give gifts that exceed your annual exemption amount, you can tap into your lifetime exclusion and not have to pay tax on those gifts. For 2011 and 2012, the gift tax exclusion and the estate tax exclusion have been unified, with an exclusion amount of $5 million. This means that if you give gifts that exceed the annual exemption amount, you can tap into your $5 million lifetime exclusion, paying no gift tax now. But, the portion of the $5 million you’ve applied toward avoiding gift tax liability won’t be available to you for purposes of avoiding estate tax liability when you pass away.
The gift and estate tax provisions of TRA 2010 are scheduled to expire at the end of 2013, with the lifetime exclusion amount reducing to $1 million. So be aware: the rules are apt to change significantly in 2013, depending on what Congress decides to do.