Estate planning attorneys are often asked questions about how gifts are taxed. We would like to take a brief look at the subject here.
When it comes to gifting there is a giver and a receiver. Someone who receives a cash gift does not have to pay income tax on these incoming funds. There is however a caveat.
For example, if you were to receive a certificate of deposit as a gift there would be appreciation over time. Any earnings that are accumulated above and beyond the initial amount of the cash gift would be taxable.
The giver of gifts on the other hand may encounter some serious tax exposure. You can give as much as $13,000 to any number of individuals every year before you have to concern yourself with the gift tax.
Anything that you give that exceeds $13,000 is taxable at a rate that stands at 35% this year and 55% next year.
It should be noted that there is a lifetime estate/gift tax exclusion of $5.12 million in 2012 that could be utilized to give tax-free gifts exceeding $13,000 per person.
However, this exclusion goes down to just $1 million next year. So let’s say that you gave $600,000 in gifts throughout your life using the lifetime exclusion and you passed away when the exclusion was $1 million. Only the first $400,000 of your estate would pass to your heirs free of the imposition of the federal estate tax.
The above is true if you took no steps to gain estate tax efficiency. If you discuss your situation with a good Central New Jersey estate planning lawyer you may find that you can position your assets in such a manner as to reduce or even eliminate your estate tax exposure.