Have You Gifted Money to Loved Ones This Year? Time is Running Out!

Posted December 12, 2011 in Estate Planning by

You can bring financial joy to someone’s life this season. Money isn’t everything, but it beats whatever is in second place. And the federal government even encourages you to give your money away.

That’s because the US tax code allows individuals to give monetary gifts to others each year. You can give a gift of up to $13,000 to someone else each year and neither of you have to pay taxes on the money. And the giver isn’t limited to just one $13,000 gift a year. You can give many gifts without getting hit with taxes, but you must not give any one person more than $13,000 in total gifts.

Why, you may be asking yourself, would you want to give your money away? Two words: Estate taxes.

Sharon Siegel“People should approach the concept of annual lifetime giving from two perspectives: tax wise and the emotional benefit,” says estate planning attorney Sharon M. Siegel, a partner at Siegel & Siegel, P.C.

“From a tax perspective, annual lifetime giving reduces the size of your taxable estate and, in turn, reduces the estate tax burden for your beneficiaries who are likely the recipient of your annual gift. Depending on the asset you gift, you may have potential income tax benefits as well. In addition to the tax benefits, you will get the pleasure of seeing your loved one put the money to use when he or she receives the gift.”

The Nitty-Gritty Details of the Annual Tax-Free Gift Limits

If the idea of making tax-free gifts sounds appealing, you have just three weeks to act before the clock resets for 2012. You need to act soon, so let’s look at the details.

A few things to know:

    • Money you and your spouse give to one another while alive is tax-free regardless of the amount—provided your spouse is a US citizen. If your spouse isn’t a citizen, you can only give him or her $136,000 in tax-free gifts in 2011 and $139,000 in 2012.
    • It doesn’t matter if a monetary gift is given in one lump sum during the year or in several chunks. The tax-free limit is $13,000 per year per person, not per gift.
    • The annual tax-free limit for 2011 and 2012 is $13,000, but if you’re married, your spouse has a separate $13,000 limit. That means you could give $13,000 a year tax free to your daughter and your spouse could also give her $13,000 a year tax free, for a combined total of $26,000 in annual gifts.
    • There is no limit on how many monetary gifts an individual can receive without paying taxes. If you’re fortunate enough to be the recipient, you can collect gifts from everyone who wants to make the gifts—all tax free.
    • In addition to cash, other gifts with value—such as stock or real estate—also count toward the $13,000 annual tax-free gift limit.
    • If you wanted to give someone a gift that’s larger than $13,000 (or $26,000 if you’re married), now is the perfect time. Suppose you want to give your Mom $25,000. You could give her $13,000 on or before Dec. 31, then give her the remaining $12,000 in January.

Lifetime Gift Limits

In addition to the $13,000 per person limit, there is one more limit you should be aware of: The lifetime gift and estate tax exemption.

The lifetime gift and estate tax exemption is the total amount that you’re allowed to give away tax free during your lifetime. If you die in 2011, your lifetime limit is $5 million. That’s more than 380 gifts of $13,000 each, which is probably more than most of us can afford to give away.

One other important item to note: The annual tax-free gift limit as well as the lifetime limits are adjusted annually, so you should make sure you’re aware of whether they’ve changed from year to year. In 2012, the annual tax-free limit per recipient remains at $13,000. The lifetime limit rises to $5.12 million.

Jennifer E. King is a news reporter for the Lawyers.com.

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