Practical Family Tax Planning; Get to Know the Gift Tax Rule.

 Yes, the Federal government has bailed out Wall Street, Detroit, and spent stimulus money at an unprecedented pace in an attempt to avoid a deeper recession. States across the country have massive budget shortfalls. Our government at all levels (Federal, state, and local) will be reducing benefits and increasing taxes to help pay for it all. An article published last month on CNN Money discusses this development at the state level:  http://money.cnn.com/2009/12/04/news/economy/state_tax_increases/index.htm

In this environment, it is imperative that you have a good handle on tax issues and know how your decisions affect your taxes. The name of the game is reducing your tax debt to protect your money from these higher tax rates we all know are coming. Here I'll tell you about a little-discussed tax topic to ensure you keep your money with your family and not hand it over to the IRS: financial gift giving.

Did you know that you can give anyone up to $12,000 a year completely tax-free? It's true. The IRS allows gifts of up to $12,000 without any taxes due. And if you're married, between you and your spouse you can give $24,000 to any individual before taxes. 

This is called the annual gift tax exclusion, and it is very useful in many practical ways. First, it can be an effective way to pass your wealth to the next generation without having estate tax problems, which are currently being discussed for increases in Congress. For example, if you're married and have 3 children, you and your spouse can each give each of you children $12,000 a year tax free. That means you can effectively give $72,000 each year ($24,000 combined to each child) to your children without worrying about paying Uncle Sam. Talk to a tax representative to set this up, as it may involve establishing a trust depending on how you want things arranged. As you see, it pays to know the rules and plan ahead.

There are also several types of gifts that are not subject to this tax: gifts for qualified education expenses, qualified medical expenses, gifts to charities, gifts to your spouse, or gifts to political organizations. So paying your child's tuition or a loved one's medical expenses does not count as a gift that could be taxed. Another good point to know is that if you give a present to someone, like a car, you must report the free market value of the gift at the time of the transfer on Form 709. I often talk to people who assume they can subtract the amount they spent on the car as their cost for the gift, but this is not true. 

You have to fill out Form 709, the Individual Gift Tax Return, if your gift to any one person or group is greater than $12,000 (including a future interest), you and your spouse are splitting gifts, or if you gave your spouse interest in property (like your house) that will be ended by some future event (like death). 

Just knowing about this exception is powerful tax knowledge as you plan your tax savings and try to hold onto your wealth in these trying times. You now know something most people don't when it comes to taxes. There are a few details about gift giving you should know about before you give someone a large gift, and I don't want to get into them here for the sake of all readers. However, I do recommend you discuss your specific situation with your tax representative before you start making big moves to make sure you're doing things correctly.