What Is the Tax Limit for Parents' Gifts to Children?
Estate planning is a very complex subject, and the tax laws regarding estates are equally complex. Given these circumstances, many financial experts suggest giving away at least some of your estate while you are still alive. One way to accomplish this is by giving gifts to those you plan to leave your inheritance to. The IRS has a tax-free gift program whereby anyone can give anyone else a gift of up to $13,000 annually tax free.
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$13,000 Annual Exclusion
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IRS regulations permit you to give any other individual an annual gift of up to $13,000 tax free as of 2009. Any amount greater than that would incur a gift tax. You can give gifts of up $13,000 to as many people as you like without tax consequences. You can also the same person another $13,000 the next year.
Estate Tax Laws and Estate Planning
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Although the estate tax laws are currently in limbo and are expected to be renewed again in 2011, the IRS formerly imposed a 39 to 45 percent estate tax with a $3.5 million exemption. That is, the first $3.5 million of the estate can be distributed without taxes, but the rest of the estate will be taxed.
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Gift Tax
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Many people mistakenly believe a gift tax means that the giver has to pay taxes that year on the amount over the $13,000 annual exemption, but that is not correct. Any amount that is subject to a gift tax refers to an amount that will count against the $1 million dollar gift tax exemption the IRS allows per individual. For example, if a parent gave a grown daughter $25,000 a year for five years $12,000 per year year would be subject to gift tax. After five years, the parent has used up $60,000 of his $1 million lifetime exemption, meaning he can only distribute another $940,000 tax-free for the remainder of his life.
Estate Planning
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Giving gifts up to the annual exemption amount to those you plan to receive your inheritance is a good estate planning strategy as the gifts will avoid the heavy estate tax. Plus the sooner you give the money to the recipients, the more they can use it to enhance the quality of their lives.
Exceptions
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One other thing to keep in mind is that you can legally give any or all of someone's educational or medical expenses tax free simply by paying those expenses directly to the institution to which the funds are owed. If you want to pay for your grandson's college tuition, you can do so tax free as long as the gift is given to the university directly.
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References
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