Volume 8 Issue 2007

Individuals who intend to make substantial gifts to family members or others often have questions about possible federal tax consequences. Two common misconceptions about gift giving are that the person receiving the gift must pay any gift tax owed, and the person making the gift can claim an income-tax deduction. In fact, if there is a gift-tax obligation at all, the burden is on the individual making the gift. And gifts to individuals are not deductible for income-tax purposes.

Gift and estate taxes are the two primary forms of “transfer tax.” The purpose of the gift tax is essentially to discourage people from giving away substantial assets during their lifetimes, thus circumventing the estate tax.

The Annual Exclusion

The federal tax law allows you to give up to $12,000 annually (per recipient in 2007) to an unlimited number of individuals — with no tax or reporting obligations. For example, if you make a $10,000 monetary gift to John in February, and then give John a $1,500 television in December, the total, $11,500, falls below the $12,000 annual limit, and no gift-tax issues are raised. Note, the annual exclusion amount is adjusted for inflation.

Unlike the federal annual exclusion of $12,000 per donee, Tennessee’s annual gift tax exemptions are divided into two classes "A" and "B". Each donor is allowed the same $12,000 annual exemption for each Class A donee. Class A donees include the following: husband, wife, son, daughter, lineal ancestor, lineal descendent, brother, sister, son-in-law, daughter-in-law, or stepchild. If a person has no child or grandchild, a niece or nephew of that person shall be a Class A donee.  Any other donee not specifically designated above as Class A is classified as Class B. There is a single Class B exemption of $5,000 and a per donee exclusion of $3,000. Please contact us for clarification of these rules since they can be tricky to master.

Gift Splitting

Married couples can give away up to $24,000 (per recipient in 2007) each year using their gift-tax annual exclusions. Even if one spouse writes a check for $24,000 from his or her “individual” account, the couple can elect to “split” the gift so that, for gift-tax purposes, it is presumed that $12,000 comes from the other spouse.

Lifetime Exemption

The tax law also provides a lifetime gift-tax exemption (currently $1,000,000) beyond the $12,000 annual exclusion. It is part of what is currently the $2,000,000 “applicable exemption amount” provided for estate-tax purposes. That is, $2,000,000 is the total amount of assets you can give away either during your lifetime or at death. For gifts beyond the annual exclusion, no tax would be due if you simply applied part of your $1,000,000 exemption amount.