How to Use the Yearly Gift Tax Exemption (IRC s. 2503(b))
Gift taxes are an important thing to consider, when it comes to estate planning. This tax is as important as the infamous estate tax. In fact the gift tax was set up by the government in order to prevent workarounds regarding estate taxes. If there was no gift tax, but an estate tax, everybody would simply transfer her or his estate to their heirs or living trusts before they died. Then no estate tax would be due in the event of death.
Because there is gift tax which taxes gifts equally to bequests, the pre-death transfer does generally not help to save taxes. However the aforementioned loophole is still open to a certain extent, because there is the annual gift tax exemption. In 2009 the gift tax exemption threshold is $13,000, meaning that all gifts made to one person are not taxable if their combined value does not exceed $13,000. If there is more than one donee, the annual exclusion applies to gifts to each of them. Staying under this number means that no gift tax is due and no gift tax return has to be filed.
As Christmas comes closer, many will think about Christmas checks for their children and grandchildren. An important regulation of the IRS is that the check is considered to be a gift in the year in which the check was cashed. Therefore if you use checks to make gifts, you should make sure, the check is cashed within the year in which you intent to use the according gift tax exemption.
Further information can be found on the website of the Internal Revenue Service.
