2012 Practical Tax Planning: Gift Exclusions

November 28, 2012Comments Off on 2012 Practical Tax Planning: Gift Exclusions

The current state of our economy has left thousands reeling to find that next dollar and maybe more importantly how to keep what they already own. Estate planning is one of the best ways to accomplish this goal and there is no better to time create or revise your estate plans. The laws in effect for 2012 are some of the most favorable for estate planners in the past 80 years. For that reason, 2012 presents a golden opportunity to reduce your future estate tax liability, capitalize on your lifetime taxable gift tax exemptions, and take advantage of current portability options.

Don’t waste the gift tax exclusion. For 2012, you can give up to $26,000 per recipient ($13,000 for single or MFS), to kids, grandkids or others without any gift tax consequences. Larger gifts also can be beneficial. You will not owe any gift tax on gifts in excess of $26,000 as long as you don’t use up your $5.12 million lifetime exception.

Don’t give away or donate an asset that has lost value since you bought it. The donee never gets to deduct the built-in loss when he or she sells the property. Instead, sell the asset first, claim the loss on your 1040, and then give away or donate the proceeds.

On the flip side, you fare far better by gifting appreciated property instead of selling it. Any future appreciation will be out of your estate, and if you are making a donation you can generally deduct the full value if you have owned the asset for over a year.

If you do wish to make a gift of cash to a charity, the current low interest rates favor use of charitable lead annuity trusts. These trusts start by paying an annuity to a charity for a set period. The remainder reverts to the donor, or it can go to other beneficiaries such as a spouse or child. Low interest rates shrink the value of the remainder, so the charity’s share is higher. That gives the donor a greater up-front deduction. In addition, if the remainder doesn’t revert to the donor nearly all the appreciation on the trust assets are outside of the donor’s estate, avoiding the estate tax limitations.

Worried about the future costs of college? Use a college savings plan to help your kids or grandkids with their education. You can put in up to $130,000 ($65,000 for single or MFS) free of gift tax this year. And in most cases, the contributions are excluded from your estate. While you do not get a deduction for this on your tax return, withdrawals are tax free if used for tuition, fees or books. Be aware, if you do maximise your contribution to a single recipiant you will have used-up your exclusion for the next 5 years.

On the other head, if they are already in school direct tuition payments made on behalf of a student don’t count against the $13,000 exclusion or $5.12 million lifetime exemption.

About author:

Darrel serves as the Executive Director of Darrel Whitehead CPAs, an accounting practice performing tax, accounting, and administrative services. Beginning his career at Arthur Andersen, Darrel moved on to a regional CPA Firm, Singer Lewak in business management developing expertise in taxation and managing the business affairs of high profile clients in the music and entertainment industries.

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