How to Avoid Paying a Federal Gift Tax

by Updated March 21, 2013

What is a gift tax? It is a tax imposed by the government on money or property given by a person to third parties. This tax can be applied on expensive gifts such as houses, bonds, stocks and cash. It is also applicable to huge donations to charitable institutions or even for Medicaid or estate planning purposes.  In the 2012 tax year, you can give up to the annual exclusion amount ($13,000 in 2012) to as many people you want every year, without facing any gift taxes. Keep in mind, if you have 1,000 friends that you would like to bestow $13,000 each, you can give away $13 million a year without ever having to fill out a federal gift-tax form. Also, note that the Recipients never owe income tax on the gifts.

In addition to the annual gift amount, your can give a total of up to $5.12 million starting in 2012 in your lifetime before you start owing the gift tax. If you give $15,000 each to ten people in 2012, for example, you'd use up $20,000 of your $5.12 million lifetime tax-free limit—ten times the $2,000 by which your $15,000 gifts exceed the $13,000 per-person annual gift-free amount for 2012

How can you avoid paying gift tax? Well, here are 8 steps that can help you do just that.

1.) Know the gifts which don’t come along with tax. A few of them are the following:

  • Gifts that are given to eligible charitable institutions. For you to know whether a gift is taxable or not, ask the opinion of a tax attorney or public accountant.
  • Those that are given to political groups for their campaign.
  • Property or money that is used to pay hospital bills.
  • Property or money that is used to pay for a person’s college education.
  • Things that you give to your spouse who is a US citizen.

 2.) Give gifts to someone without going beyond the annual limit of $13,000 per person. By doing so, you are free to shower gifts to all of your friends without worrying about the gift taxes that you are going to pay. If you have the money to purchase expensive gifts, then do whatever makes you happy. Just always take note of the limit for you to be properly guided on your purchases.

3.) Provide gifts jointly with your husband or wife. You and your partner both have the yearly limit of $13,000 respectively. Thus, if you give gifts jointly, then you are free to provide a gift amounting to $26,000 to a particular person within a year. You won’t pay any tax for this amount and you would surely make the recipient of your gift truly happy as well. It’s as simple as that.

4.) Provide gifts to couples who are legally married. As you can see, signing a marriage contract does have certain benefits and advantages. For example, if your daughter already has a husband, then you are free to give $13,000 to your child and another $13,000 to her partner without paying any gift tax. Just make sure that you do the gift giving within a year for the limit only applies to a time period of 12 months.

5.) Give a property following the fair market value of the gift. The fair market value of a property is not influenced by any factor and it is the true price of the property. If you provide a gift following this value, then you can let gift tax easily slide from your back. It is something that you don’t have to worry about if you stick to the fair market value. Adhering to the value makes the gift a sale which is the factor that exempts you from the tax.

6.) Build a Trust. A few trust types can prevent you from paying gift taxes. Dynasty Trusts, Personal Residence Trusts and GRAT or Grantor Retained Annuity Trusts are just some of the trusts that you can use for this matter. For you to know the difference between these programs, consult the advice of a tax attorney or public accountant. He or she can help you choose the trust type suited for your current situation.

7.) Make use of your lifetime exemption from gift tax. In order for you to make use of this exemption, you would just have to give a gift which has an amount that goes beyond the $13,000 annual limit. If you’re going to make use of your lifetime exemption from gift tax worth $500,000, then you can just deduct the tax that you ought to pay for exceeding beyond the yearly limit from the exception that you are entitled to.

8.) Provide the gift as an inheritance to the people whom you would leave behind in the future. State inheritance taxes would definitely cost your heirs less compared to federal gift taxes. Leaving your estate as an inheritance is a big help to your beneficiaries. This would allow them to have the inheritance for they won’t be forced to sell it in auctions just to pay for the taxes.




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