Gift tax is a federal tax imposed on assets transferred to third parties for less than their fair market value. Individuals can transfer their assets to others for less than fair market value for medical purposes, charitable reasons, or simply to ease the transfer process, or to give a friend or family member gifts like large sums of cash, stocks, bonds, or portions of real estate.
Part 1
Step 1: Know Which Gifts Are Exempt from Tax
You need to be aware of which gifts are not subject to tax. The federal government does not impose taxes on all gifts. Here are the types of gifts that are exempt from tax:
- Gifts given to your spouse who is a U.S. citizen. You can transfer an unlimited amount of property to your spouse as long as he/she is a U.S. citizen.
- Gifts used for education. Money or property used to pay for college or university tuition is exempt from federal gift tax as long as you pay it directly to the educational institution. So instead of simply giving, say $15,000 (about 500,000 rubles) as a gift, pay for a year of college tuition instead. To determine if a particular college or university is an eligible institution for federal tax purposes,
- Gifts intended for medical expenses. Money or property intended to pay for medical services is exempt from federal gift tax if paid directly to the medical institution.
- Gifts made to political organizations for their discretion. To determine if a gift made to a political organization is exempt from taxation, consult with a qualified accountant or tax attorney.
- Gifts made to charitable organizations. To determine if a gift made to a charitable organization is exempt from taxation, consult with a qualified accountant or tax attorney.
Step 2: Limit Gifts to the Annual Exemption Amount, which was $13,000 in 2011.
Limit gifts to the annual exemption amount, which was $13,000 (about 450,000 rubles) in 2011. You can ignore the annual exclusion if you gift every year. Then you won't pay any tax.
Step 3: Make Gifts Together with Your Spouse
Make gifts together with your spouse. Since both of you have limits on the annual gift tax exemption, you can combine your gifts for a doubled amount. For example, in 2011, you and your spouse could give your child $13,000 (about 450,000 rubles) each. You could gift $13,000 (about 450,000 rubles) to your child, and your spouse could do the same. Together, that totals $26,000 (about 900,000 rubles).
Step 4: Gift to Both Husband and Wife
Gift to both husband and wife. Just as spouses can double the amount gifted if they give together, you can also double the gift amount if you gift to a married couple. For instance, in 2011, you could gift $13,000 (about 450,000 rubles) to your son and another $13,000 (about 450,000 rubles) to his wife. Together, this totals $26,000 (about 900,000 rubles) without incurring gift tax.
Step 5: Use Your Lifetime Gift Tax Exemption
Utilize your lifetime gift tax exemption. An individual can make certain gifts up to $5,000,000 (about 175,000,000 rubles) excluding the annual amount without paying gift taxes. If you exceed the $5,000,000 (about 175,000 rubles) limit, you will owe taxes. If you gift $14,000 (about 490,000 rubles) a year for five years, you would owe taxes on $1,000 (about 35,000 rubles). In total, you would owe $5,000 (about 175,000 rubles). You can use your tax exemption to deduct $1,000 (about 35,000 rubles) from your gift tax. After five years, you would have utilized $5,000 (about 175,000 rubles) of your $5,000,000 (about 175,000 rubles) exemption.
Step 6: Trusts Are Another Way to Avoid Taxes
Trusts are another method that can exempt you from paying taxes. Here are some of the most well-known trusts for this purpose:
- GRAT Trust – a financial vehicle commonly used in the U.S. to make large gifts to family members without incurring taxes. This trust is based on a set number of years before a child or grandchild can access the funds. Thus, the individual takes a waiting position to receive "waiting property." Over the years, the individual receives distributions from the trust annually. It all depends on when the trust account is created.
- Personal Residence Trust. This is a trust that holds a primary personal residence. The terms of the trust stipulate that the beneficiary must wait a certain number of years before being able to take possession of the home. The same principle applies as in the previous trust. The value of the gift is not assessed at the time the trust account is created. The house will be appraised before the beneficiary receives it, and the assessed value is not subject to gift tax.
- Dynasty Trust. Similar to the GRAT trust, this reduces or completely eliminates the gift tax in the same way. The value of the gift is not assessed when the trust account is created. A dynasty trust is designed for multiple generations, taking into account the interests and income of several successful generations without incurring gift taxes.
Step 7: Transfer Property at Fair Market Value
Transfer property at its fair market value. Fair market value is defined as the price at which property would change hands between a willing buyer and seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts. Relevant facts include how well the item functions, its age, and whether it has suffered any damage. When property is transferred at fair market value, it is exempt from gift tax, as it is considered a sale rather than a gift. For example, if your car is worth $10,000 (about 35,000 rubles), and you give it to your child in exchange for $10,000 (about 35,000 rubles), you are effectively selling the car, not gifting it.
Step 8: Give Gifts as Inheritance After Death
Give gifts as inheritance after your death. In 2011, federal estate taxes do not apply to property valued at less than $5,000,000 (about 175,000,000 rubles). If federal estate taxes are not assessed, the inheritance will be transferred at a lower cost than if it were a gift. State inheritance taxes generally have a higher exemption level than the federal gift tax. For instance, in Indiana, a child, grandchild, or parent of the deceased could inherit up to $100,000 (about 3,500,000 rubles) without paying inheritance tax.
