Will your gifts bring a tax surprise?

When it comes to gift giving, surprises are part of the pleasure. When it comes to gift taxes, surprises are the last thing you want. To help protect you from the unexpected, here are answers to common questions about federal gift tax law.
Question: How does the annual exclusion work?
Answer: The annual exclusion lets you make certain gifts up to a specified dollar limit each year ($12,000 for 2008), to anyone you want, without having to pay gift tax or file a gift tax return. The exclusion is automatic, so you don't have to make an election to claim it.
Example: You give $10,000 cash to five different friends during 2008. Though you've given away $50,000 in total, each gift is less than $12,000. No gift tax return is required, and neither you nor your friends will owe gift tax.
Since the exclusion applies on an annual basis to the first $12,000 of gifts you give to any one recipient, there's no carryover of unused amounts, either to another person or to the following year. In addition, the exclusion typically covers only gifts of "present interests," which means the person to whom you give the gift has immediate unrestricted rights to the property.
Question: Are any other exclusions available?
Answer: You can use the education exclusion to make direct payments to a school for tuition with no gift tax consequences, no matter the amount.
Medical expenses you pay directly to the provider on behalf of a friend or family member are also excluded from federal gift tax.
A third exclusion is marital: You can generally give unlimited tax-free gifts to your spouse. (Special rules apply to spouses who are not U.S. citizens.)
Question: What is gift splitting?
Answer: Gift splitting lets you and your spouse apply both of your annual exclusions to a gift. In effect, you elect to make a joint gift.
Example: You give $24,000 to your son during 2008. Your spouse consents to gift splitting, which allows you to treat the gift as if each of you made one-half of it. In most cases, you'll both have to file a gift tax return, but your combined exclusion will shelter the gift from tax.
Question: What is the lifetime exemption?
Answer: Gifts you make in excess of your $12,000 annual exclusion that are not sheltered by gift splitting or other exclusions may still be tax-free. Under present law, you can make cumulative taxable lifetime gifts of up to $1 million before the gift tax kicks in.
Note: Although no tax is due on gifts qualifying for the lifetime exemption, you're still required to file a gift tax return.
In addition to the satisfaction of making a friend or family member happy, gift giving can be a valuable estate planning tool. Please contact us with your questions about federal or state rules. We'll be happy to discuss gifting strategies.