In 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act of 2010) increased the federal gift tax exemption from $1,000,000 to $5,000,000 through 2012. After 2012, the exemption is decreased to $1,000,000. If you and your spouse agree to share the gifts as being made one-half by each you can give up to $10,000,000 without incurring and Federal gift tax. If you have used the gift tax exemption in the past you should reduce your total exemption in 2012 by the previously utilized exemption. For example, if you have already utilized $1,000,000 of the exemption you can still use $4,000,000 in 2012.
If you give a gift that exceeds the annual gift exclusion ($13,000 per person for 2012) it constitutes a taxable gift with the tax paid by the donor of the gift. You only pay tax on a gift if it exceeds the gift tax exemption ($5,000,000 for 2012 and $1,000,000 after 2012). The top tax rate for gift taxes is 35% for 2012 and 55% in 2013 if no legislation is passed to alter it. You are required to file a gift tax return for any taxable gifts even if you are only showing utilization of the gift tax exemption.
If you are planning to give substantial gifts to family or friends in the foreseeable future, 2012 is the time to do it to take advantage of the increased exemption. By using the additional $4,000,000 exemption in 2012 you could save up to $1,400,000 in federal taxes.
Please contact us to discuss your gift and estate tax planning.