Tax Tips & Calculators

If you gave someone gifts valued at more than $13,000:

• You must report the total amount of gifts to the IRS.
• You might have to pay tax on the gifts.

If you or your spouse make a gift to a third party, the gift can be considered as made half by you and half by your spouse – known as gift­splitting. Gift­splitting allows you and your spouse to each claim the exclusion resulting in the ability to double the exclusion.

Ex: If in 2011 you made a $20,000 gift to someone, you can exclude only $13,000 when figuring the amount of gift tax owed. However, if you elect gift­splitting, both you and your spouse can use the $13,000 exclusion individually. Once gift splitting is elected, you´ill each be considered to gift $10,000. This will avoid gift tax, since each spouse is now gifting an amount less than their $13,000 exclusion. To elect gift­splitting, both you and your spouse must agree to split the gift and file Form 709.

The person who receives your gift doesn't have to report it to the IRS or pay gift or income tax on its value.

Taxable Gifts

Gifts include money and property, including the use of property, without expecting to receive something of equal value in return. If you sell something for less than its value or make an interest­free or reduced-interest loan, you might be making a gift. There are some exceptions to the tax rules on gifts.

These gifts don't count against the annual limit:

• Tuition or medical expenses you pay directly to an educational or medical institution for someone's benefit
• Gifts to your spouse
• Gifts to a political organization
• Charitable donations

Estate Tax

The money and property you own when you die – known as your estate – might be subject to federal estate tax. If the estate is worth more than the exclusion amount, it´s usually taxable.

The Economic Growth and Tax Relief and Reconciliation Act (EGTRRA) of 2001 originally repealed the estate tax. Under EGTRRA rules:

• There´s no estate tax for 2010
• A modified carryover basis system replaces the step-up basis rules for inherited assets.

However, the Tax Relief Act of 2010:

• Reinstated the estate tax and the step-up basis rules for those who died in 2010.
• Increased the estate exemption amount to $5 million
• Created a special election that the estate executor can make to use the rules originally in place for 2010. So, there´s no estate tax and the modified carryover basis rules apply.

For 2011, most relatively simple estates don´t need to file an estate return (Form 706) if the total value of the estate is less than $5 million.

In 2010 only, if the value of the estate was more than $5 million, the executor could have used the modified carryover basis rules to avoid paying estate taxes. Beneficiaries of those who died in 2010 should check with the executor to see if he or she made the special election to use the modified carryover basis of the assets. Relatively simple estates include:

• Cash
• Publicly traded securities
• Small amounts of easily valued assets
• Those with no special deductions or elections
• Property not jointly held

Also, prior to 2010, the person who receives your estate usually won´t have to pay an estate tax or an income tax on the value of the inheritance.
If the deceased died in 2010 or after, the basis of the property will be deceased´s basis at the date of death plus any additions to basis the estate´s executor might choose to make.

Reduced Tax on Appreciated Securities

If you give your child appreciated securities – like stock or mutual fund shares – the tax bill on the increase in value is passed on to the child along with the gift.

Ex: Stock you bought for $2,500 is now worth $5,000. If you sold the stock, you´d owe tax on the $2,500 gain. Since 15% is the rate on long­term capital gains, it would cost you $375.

If you gave the shares to your child, the same $2,500 would be taxed, but at your child's rate. Your child´s income might be low enough to allow his or her long­term gains to be taxed at the 0% long-term capital­gains rate in effect for 2009 through 2012. So, you eliminate the tax bill.

Under current law, the 0% long­term capital­gains rate was extended to Dec 31, 2012. After this date, long­term capital gains will be taxed at 10% or at 8% for assets held more than 5 years.