The federal tax code permits any person to give up to $12,000 per year to an unlimited number of persons without paying any gift tax or filing a gift tax return (did you even know there was such a thing as a gift tax and a gift tax return?). You can give to any people you like – children, grandchildren, siblings, friends. If your spouse joins you in the gift, the two of you can give up to $24,000 to any person, without paying gift tax or filing a gift tax return. Giving away part of your estate is an old but effective strategy to save on estate taxes.
You can give money, stock, savings bonds, partial interests in real estate, or partial interests in your business. The recipient of your gift does not pay gift or income taxes on the gift. The annual gift that you are allowed to make must be completed by December 31 of each year. If you give a gift by check, the check must be deposited in the recipient’s account by the end of the year. If there are stock transfers, the transfer must be done by December 31st. Since the transfer of stock as a gift is not considered a sale, you do not pay capital gains tax and the recipient doesn’t pay the capital gains tax until he/she sells. Your recipient takes your cost basis and your holding period. This means if you owned the stock for more than a year before you gave it to your son as a gift, your son now owns a long-term capital asset. And when he sells the stock you gave him, even if it is a month after you gave him the stock, he pays the long-term capital gains tax due.
If you want to give a gift of more than $12,000 to any one person, you can give away up to $1 million without being required to pay gift tax. If you give a gift over the $12,000 limit, you must report the amount of the gift on a gift-tax return (Form 709) which must be filed with your income-tax return.
Right now, with the stock market so battered, people are feeling the pinch and may not want to give any gifts. But the stock market will come back and every year that you do not decrease the size of your estate may be a lost opportunity to save on estate taxes. As of January 1, 2009, you can give an unlimited number of $13,000 gifts ($26,000 if your spouse joins in the gift).
The best guess is that the entire gift and estate tax scheme will be changing with the new Congress and President being sworn in next year. Although we cannot predict what they will do, the expectation is that estate taxes will go up and it may be harder to decrease the size of your estate to save on estate taxes. If you have a large estate, talk to your financial advisor and your lawyer to find out whether gift giving is right for you.