The Federal Gift Tax

The current economic environment has created some unique circumstances for us Baby Boomers. Our sources of income from retirement resources may be fixed or declining due to market losses, yet, we see ourselves needing to pay for goods and services that are rising in cost. We may also need to subsidize family members who are victims of the unemployment crisis or fund long term care costs for aging parents. Closing these financial gaps is challenging enough, but without realizing it we may be subjecting ourselves to federal gift taxes. Fortunately, there are some exemptions available that can alleviate paying a gift tax. Even better, the life-time exemption amount was increased in 2011.

The federal gift tax can be a bit confusing. It is a separate tax from estate taxes and many folks don’t know about it. Each of us may make gifts (cash or in-kind) to non-spousal family members of up to $13,000 annually, tax free. (Gifts to spouses are not taxed.) Amounts over $13,000 in a given year are taxable. However, those amounts can be applied against a life-time exemption which was raised from $1,000,000 to $5,000,000 in 2011. What many folks don’t realize is that once the $13,000 annual exemption has been exceeded you must file a Form 709 to claim the amount against the life-time exemption. The filing is due on the same date as Federal Income tax returns are due, April 15. If you find that you are required to file this return and haven’t done so, filing late is better than not filing at all. Failure to file makes you subject to fines, while penalties for late filing may not be payable since you can claim the life-time exemption. That is, penalties for late filing are calculated by applying a percentage to the tax due – no tax due, no penalty.

In this day and age, it is not hard to exceed the $13,000 if you are subsidizing a family member. When you consider amounts for housing, meals, transportation, tuition, etc., the gifts add up quickly. If you find yourself in this situation, consider paying the bills directly yourself rather than giving the money to your family member and having them pay for it. The latter situation is considered a gift. In any event, if you find yourself in such a situation, consult your tax advisor on the appropriate ways to avoid or minimize gift taxes.

Keep those letters coming folks. Send in your ideas to: The Frugal Forum, P.O. Box 693, Huntley, IL 60142 or by email to: thefrugalforum@gmail.com.

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