Essentially, gifting is an excellent way to reduce estate taxes because the gift giver is reducing the size of the taxable estate.
Although gift and estate tax rates are the same, it costs less to make a gift and pay the tax while one is living than it does to wait until after one is deceased and have the estate pay the estate tax. That’s because the amount paid in gift tax is no longer included amongst the taxable estate.
How much can I give without reporting the gift to Uncle Sam?
The amount one can give someone each year without having to file a gift tax return or pay a gift tax is currently $12,000 per recipient ($24,000 if married). One can also give an unlimited amount for tuition and medical expenses if the gifts are made directly to the educational organization or health care provider. Charitable gifts are also unlimited.
Do gifts have to be in cash?
No. Appreciating assets make great gifts because any future appreciation will also then be out of the taxable estate. It is not unreasonable to gift a portion of land worth $12,000 annually for many years until the complete value of the property has been gifted.
Oops, I gifted more than $12,000
Oops is right. Any gift that exceeds $12,000 starts using up the $1 million federal gift tax exemption. One must then file an informational gift tax return (Form 709) for the year in which the gift is made. Once the $1 million exemption has been exhausted, one must pay a gift tax on any gifts over $12,000. The gift tax rate is equal to the highest estate tax rate in effect at the time the gift is made. In 2007 and 2008, it is 45%.