Gift tax may be one of the IRS’s most-hated practices, but there are several ways to eliminate it.
As discussed in our previous article (Gifts and Gift Tax Return), not only is gifting beyond a certain limit (to anyone other than one’s spouse) taxable by the Internal Revenue Service (IRS), but also any delay in filing the gift tax return could lead to penalty and interest charges. Fortunately, there are various acceptable ways by which a gift tax may be eliminated.
AG Tax professionals have summarized some of the few important methods for eliminating the gift tax. However, it is always advisable to discuss any tax measures with a tax professional as their suitability may vary on a case-by-case basis.
Ways to Eliminate U.S. Gift Tax
• Medical and Educational Expenses
Medical and educational expenses are always exempt from gift tax. An individual may consider making a gift up to the threshold limit ($14,000 for 2013), then any excess amount can be paid in the form of medical or educational expenses, instead of monetary or other tangible gifts.
• Gift-Splitting
If a married couple makes a gift to a third party, the gift can be considered as made one-half by each spouse, even if the gift is from only one of them. Gift-splitting helps double the threshold limit. However, this option is limited to married couples where both partners are U.S. citizens. See our previous article (Using Gift-Splitting to Double your Tax Exemption) for further details.
• Unified Credit
The unified credit applies to both the gift tax and the estate tax and it equals the tax on the applicable exclusion amount. You must subtract the unified credit for any gift or estate tax that you owe. Any unified credit you use against gift tax in one year reduces the amount of credit that you can use against gift or estate taxes in a later year. The unified credit on the basic exclusion amount for 2013 is $2,045,800 (exempting $5.25 million of assets from tax).
Example: For 2013, the gift tax threshold limit is $14,000, while the gift/estate tax limit is $5.25 million. If a taxpayer makes a gift worth $25,000 in 2013, he/she may claim the $14,000 annual gift exemption and apply the remaining $11,000 to the lifetime gift exclusion – resulting in no gift tax.
However, any unified credit used against the gift tax in one year reduces the amount of credit that will be available against gift taxes in a later year and also reduces the credit available to use against estate tax. In the above example, the $5.25 million exclusion would be reduced by $11,000 for the following years.
• Set up a Trust
Certain trusts may be suitable for high net-worth individuals to make gifts to their children and grandchildren beyond the yearly threshold limit. AG Tax works closely with cross-border lawyers and it is strongly recommended that an individual consults a trust and estate lawyer before creating any trusts, as only a professional can suggest the right type of trust based on an individual’s need.
There could be other possible ways to eliminate or reduce the impact of gift tax applicable to your situation, but only a proper tax analysis by a professional can fully explain all of your options.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
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Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
