Gift Tax Confusion

Ideas for these columns often come from client questions. With the focus on the looming “tax cliff,” massive changes in income, estate, and gift tax laws come January 1, 2013, absent Congressional and presidential action, confusion is understandable. Clients ask about changes in the annual gift tax exclusion and the lifetime gift tax exemption. These are two different issues and often are confused.

The annual gift tax exclusion is the amount that you may give away to any number of people free of federal gift tax. For 2012 the annual gift tax exclusion is $13,000. There are exceptions, including gifts to a spouse.

Couples may use the exclusion, so if grandma and grandpa each wanted to give money or other assets to a grown child or grandchild, they may gift a total of $26,000. As things stand now the annual exclusion for 2013 and beyond is $13,000, subject to an inflation adjustment.

 Gifts to a 529 College Savings Plan are subject to the annual exclusion. An individual may contribute up to $13,000 per year to a 529 plan with no gift tax implications. A couple may contribute $26,000 per year per offspring or grandchild, or any child for that matter. However, 529 plans allow you to “front load” the gift, gifting up to five years worth of exemptions lump sum.

 Hence, a parent or grandparent could make a lump sum gift of up to $65,000 per child ($13K X 5), or double that per couple, $130,000. This works if you do not make further gifts during the five year period.

 Suppose you have unrealized capital gains attached to an asset, such as a stock. In 2013, a long term capital gain is scheduled to be taxed at 20% versus 15% in 2012. Plus higher earning individuals ($200,000 filing single; $250,000 filing joint), will see certain net investment income, including capital gains, subject to an added Medicare tax of 3.8%, for a total marginal tax drag of 23.8%, a 59% increase in taxes paid compared to 2012. You might consider taking some gains this year and moving the money into a 529 plan.

 Under the unlimited marital deduction, you may gift unlimited amounts to your spouse free of gift tax, assuming your spouse is an American citizen. For 2012, only $139,000 may be gifted to a non-citizen spouse. Rules governing estate and gift taxes for non-citizen spouses are complex and qualified tax and legal counsel should be included in the planning process.

 The lifetime gift tax exemption differs from the annual gift tax exclusion, and big changes loom in 2013. With any comment on taxes we add the disclaimer “pending Congressional and presidential action or inaction.” For the balance of this year, the gift, estate, and generation-skipping transfer tax exemptions are $5.12 million per person, $10.24 million per married couple. That is the amount that you can transfer to an adult child, for example, or anyone else, free of gift tax over and above the annual exclusion. Gifts made during lifetime will reduce your estate tax exemption at death.

 This potential change will impact high net worth individuals with substantial assets. Those who are not in a position to make substantial gifts in 2012 do not need to be concerned.

 If the “Bush tax cuts” sunset, the estate and gift tax exemption reverts to $1 million with a top tax rate of 55%. President Obama wants an exemption of $3.5 million and a top tax rate of 45%. Candidate Romney wants to abolish the estate tax.

 With uncertainty vexing, tax lawyers report a rush of business from closely held business owners and other high net worth families pressing to take advantage of record high exemptions this year.

Investors who do not consider themselves “wealthy” are nonetheless in the crosshairs in the fight over “tax fairness.” The end of the tax year is a little over three months away and tax planning should start NOW! Procrastination could be expensive!

 The Investment Coachä 1994, Walker Capital Management Corp. Lewis Walker is President of Walker Capital Management Corp. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA  which is otherwise unaffiliated with the Walker Capital Companies.       3930 East Jones Bridge Road ▪ Suite 150 ▪ Norcross, GA 30092 ▪ 770-441-2603 ▪