Gift Tax Exemptions Going Down? Plan Properly Before 2013
By Jeffery Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott
Today is the last day of February, so there’s a good chance that unless you’ve already done so, you’re about ready to go into full tax return mode – gathering your documents, pulling together your receipts and making a list of all those charitable contributions you’re going to tell your CPA you made. And while getting your tax return filed on time is important, it’s also important to keep one eye on the future, planning ahead so that future tax returns are less painful than they otherwise might be.
Unless Congress acts before the end of the year, a number of tax changes are scheduled to take place in 2013. You’ve probably already heard of a few of them, like income tax and capital gains tax rates rising to their pre-Bush tax cut levels. One tax change that may not be on your radar however, is the return of the gift tax exemption to $1 million. The gift tax exemption is the maximum amount that you can give away during your lifetime without incurring a tax – not counting amounts gifted using the annual exclusion amount, which is currently $13,000 per year, per person. Should you give away more than the gift tax exemption during your lifetime, then any additional gifts are subject to a special tax – the gift tax – which believe it or not, is taxable to you, the giver, and NOT to the recipient of your generosity.
Now I know that $1 million is a lot of money to most people, but it’s a far cry from the current $5 million exemption. Even if you believe Congress will pass a law increasing the estate tax exemption for 2013 to $3.5 million or $5 million, which many experts believe they will, there’s talk that if they do, the gift tax exemption won’t be brought along for the ride and will remain at $1 million. So if you are lucky enough to have more than $1 million and you would like to give a large chunk of it away, you might want to keep a tight watch on any gift tax related legislation – or lack thereof – before the end of the year. If it looks like the exemption is going to go back down to $1 million, you may very well want to give now (in 2012).
A word of warning though… Don’t forget that IRAs, 401(k)s and other types of retirement accounts cannot be gifted to another person during your lifetime. That’s one of the things that make these types of accounts so different and so much more challenging to incorporate into a long-term plan. If you “gift” your IRA or other retirement account to someone during your lifetime, it’s immediately taxable – to you! The recipient will have a pile of money, but no IRA, no tax-deferral and no stretch IRA when they die. So if you’re planning on giving away some of your assets before the end of the year, make sure you’re doing so with assets that can actually be gifted!