Wednesday, December 19, 2007

Year-End Gifts

"Time Is Tight"
- Booker T and the MG's.

(Being an instrumental, "Time Is Tight" has no lyrics to quote...)

Today is December 19th - only 6 shopping days 'til Christmas. More importantly though, there are only 13 gifting days left in 2007.

What? Why does this matter?

Believe it or not, the US government taxes gifts we make to other people (other than our spouses). Yes, it's true. Most people aren't familiar with the gift tax because of the "Annual Exclusion" and the "Lifetime Exemption". The Gift Tax is related to the Estate Tax, but we won't go there today.

Annual Exclusion Gifts
The IRS Code contains a "de minimis" exception for gifts of less than $10,000 per donee, per calendar year. This exception is called the "Annual Exclusion". For 2007, the Annual Exclusion is $12,000 as the original $10,000 was indexed for inflation starting in 2002. What this means is that any person ("donor") can give any other (non-spouse) person ("donee") cash or property worth up to $12,000 in any calendar year without incurring gift tax on the transfer and without using any of their Lifetime Exemption. Married couples can "gift-split" - a technique that essentially allows double gifting per donee. Thus, a married couple can give cash or property worth up to $24,000 in a calendar year without incurring gift tax or using any of their Lifetime Exemptions.

Lifetime Exemption
The Lifetime Exemption (for Gift Tax) is the amount of cash or property a donor can give a donee/s during their life without incurring Gift Tax. The current Lifetime Exemption is $1,000,000.

Why This Matters Now
The Annual Exclusion is not cumulative from year to year. Use it or lose it. Here's an example that might prove helpful in understanding:

Let's say Grandma and Grandpa want to help fund their grandchild's college education. They decide that a 529 College Tuition or Savings Plan - such as the Washington State GET program - is the best way to do that. They have a $40,000 CD that just matured. If they put the entire $40,000 in the account in 2007, they will reduce their Lifetime Exemption by $8,000 each ($16,000 total) - the amount that the gift exceeds their combined Annual Exclusions.

Here's the solution: they "gift-split" and put $24,000 ($12,000 each) into the account before the end of 2007 and then put the remaining $16,000 in the account in January 2008. By staying under the Annual Exclusion amount, they will not use up any of their Lifetime Exemption.

Here's another reason to stay under the Annual Exclusion amount: if the amount is exceeded, you are required to file a Gift Tax Return (Form 709) with your income tax return.

There are three major exceptions to the gift tax: 1) gifts between married couples are unlimited, 2) tuition expenses - paid directly to the school - and 3) medical expenses - paid directly to the provider of services. You can pay tuition or medical expenses for another person without limit i.e., neither the annual exclusion nor the lifetime exemption apply as long as such expenses are paid directly to the school or the provider (hospital, doctor, etc). The exception does not apply if you give the money to someone and they use the money to pay their tuition or medical bills.

If you are thinking of making a gift in excess of $12,000 ($24,000 if married) seek out ways you can spread the gift over two or more calendar years to take advantage of the Annual Exclusion.

Happy Gifting!

Questions? kimm@sweetwaterinv.com

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