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| Credit Answers > Debt Resources > Estate Planning > What Are Gift Taxes |
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As a part of managing your wealth, you will naturally seek to share it with your loved ones or desired charities as you advance in years. To distribute your wealth
during your lifetime, you can give every year to your beneficiaries. This process is called gifting.
If you give what the IRS deems an excessive amount, you may be liable for gift taxes on the excess amount. For 2008, you owe gift taxes for gifts to any one individual that exceeds
$12,000 in a year. This amount is called the gift-tax exemption or annual exclusion. The gift-tax exemption is indexed to inflation in increments of $1,000.
However, you may be able to avoid, or reduce, gift taxes by deducting the amount that exceeds the gift-tax exemption from your gift tax unified credit. Here's how it works: If you
give $13,000 to a child in 2008, you would potentially owe gift taxes on the $1,000 that exceeds the $12,000 exemption. If the amount of gift tax owed was $180, you could deduct
that from your gift tax unified credit, which is $345,800 in 2008.
Your gift tax unified credit is like a running balance: if this is your first use of the credit, you would deduct the $180 and have a lifetime unified-credit balance of $345,620.
As it turns out, the gift tax unified credit of $345,800 corresponds exactly to the applicable exclusion limit for gift tax of $1 million for 2008.
You may also choose to give to a charitable organization. These are non-profit organizations that gain tax-exempt status under section 501(c)(3) of the tax code. Gifts that you
make to a 501(c)(3) entity can be deducted from your estate for tax-reporting purposes. However, gifts to entities other than charitable organizations are generally not
tax-deductible.
There are no dollar limits to how much you give to a charitable contribution. Other exemptions to the annual gift-tax exclusion include tuition or medical expenses that you pay
for someone; gifts to a spouse (which is covered with the marital deduction); and gifts to a political organization for its use.
In addition, Section 529 plans allow you to tap into future years of the gift-tax exclusion. Section 529 plans are tax-advantaged plans to save for a child or grandchild's college
education. These plans allow single parents, grandparents or other benefactors to contribute up to $60,000 in one year, and $120,000 if contributing as a married couple. (This
process of sharing a gift between two spouses is called gift-splitting.) If you decide to "front-load" a 529 plan in such a way, you may have to wait as many as five years before
making additional contributions to the plan or to the plan's beneficiary.
To record gifts in excess of the gift-tax exemption, complete IRS Form 709. You must also file Form 709 if you are splitting a gift with your spouse. Other circumstances may require
you to complete the form. See IRS Pub. 950 for more information.
Unlike the estate or generation-skipping tax (GST), the gift tax is retained in 2010. However, the tax law does lower the maximum gift tax rate that year to 35%, which will correspond
to the maximum individual income-tax rate in that year.
The following table shows how the gift-tax rate will decrease over the next several years and how it reverts to pre-tax law levels in 2011 with the expiration of the new tax
law:
| Year | Applicable Gift Tax Exclusion Limit | Maximum gift tax rate |
| 2005 | $1 million | 47% |
| 2006 | $1 million | 46% |
| 2007 | $1 million | 45% |
| 2008 | $1 million | 45% |
| 2009 | $1 million | 45% |
| 2010 | Repeal of estate tax | 35% |
| 2011 | $1 million | 55% |
The above information is educational and should not be interpreted as legal advice. For advice that is specific to your circumstances, you should consult a legal adviser.
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