Know the gift tax rules

By the way, donees need not worry about paying income tax on the value of the gift you make. However, there will be income tax consequences for the donee on any interest, dividends or rental income the gifted property generates after the transfer.

Just for the sake of argument, let's suppose you want to make a gift that's worth more than the annual exclusion amount this year. Not only do you NOT want to pay gift tax, you don't want to tap into your $1 million exemption at all. Well, although a little tax creation called "gift splitting" is not specifically addressed in your wedding vows, your spouse can come to the rescue by stretching the value of your gift and simultaneously eliminating gift tax.

Gift splitting allows a married couple to combine their annual exclusion amounts even if only one spouse springs for the gift. So, if you're married and the gift isn't worth more than $24,000, you're in luck.

How gift splitting works:
Sarah would like to transfer $24,000 this year to her son from a prior marriage. If her husband Sven consents, Sarah can make the $24,000 transfer from her own separate account without any gift tax consequences.

Consent is demonstrated by filing a gift tax return, Form 709, by April 15 in the year after the year of the gift. Once gift splitting is elected, all gifts made by a husband and wife for that year are treated as being split.

Taking gift splitting a step further:
If Sarah transfers $100,000 to her son, the $76,000 excess over the two annual exclusion amounts of $24,000 is also split. Therefore, Sarah and Sven have chipped in $38,000 ($76,000 � 2) from their individual exemptions of $1 million -- leaving them each with a remaining exemption of $962,000.

When you exceed $1 million
OK, what if you're "there" -- you owe gift tax. How bad is it? Well, it's not pretty. For gifts, the first dollar of tax imposed above the exclusion amount is paid at a marginal rate of 41 percent. And depending on the value of the gift, the rate can be as high as 45 percent.

How the gift tax works:
Assume you already used your annual exclusion to the donee when you make a gift of $1.1 million. The transfer exhausts your $1 million exemption and the $100,000 excess requires you to spring for an extra "gift" to Uncle Sam -- to the tune of (cough, cough) $41,000 -- say it ain't so ...

This is an outcome no one wants. Can this kind of result be avoided or at least minimized? Is it better to gift certain assets rather than others?

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