Legal Question in Tax Law in Indiana

Re: Gift Tax, Can I give my child 11,000 for 2003 + also 11,000 for 2004 before

The gift tax works in conjunction with the estate tax. That is, an individual can transfer property either during his or her life or at death, or both, and the gift/estate tax is calculated based on those combined transfers. Currently, every person can give annualy $11,000 to basically anyone they want to without incurring any gift tax implications. If they give more than $11,000, then the remainder is deducted from the person's lifetime exemption. It is only when the remaining amount is greater than the exemption, that gift or estate tax actually be paid. Married couples can double up and give $22,000 away annually to another person, and not have to eat into their exemption, even if only one of the parents is footing the gift.

Example 1: Mom gives her three children $9,000 each in 2004. No gift tax and no return has to be filed. The gifts are not income to the children nor are they deductible by the mother.

Example 2: Mom wants to give her three kids and her step-son $18,000 a piece. She has the money and her second husband has none. Mom and the step-dad can combine their gift allowances and each kid gets $18,000 with no gift tax consequences. However, since step-dad is not contributing any money, but only a portion of his annual exclusion, a gift tax return has to be filed showing this arrangement. Again, no tax is owed, just the filing of the return.

Example 3: Mom gives each of her three children $30,000 in 2004. $11,000 of each gift is excluded. She files a gift tax return, showing the $90,000 in gifts, of which $33,000 is excluded. The remaining $57,000 is shown as a deduction of her $1,000,000 exemption. Thus after she makes the gifts in 2004, she has left $943,000 of her gift tax exemption.

The estate credit allows up to $1,500,000, beginning in 2004. So you would be allowed to leave $500,000 more at death than through life-time gifts, but you do not get a combined 2.5 million (that is the gift and estate tax exemptions are not added together). The estate exclusion is to increase up to 3.5 million by 2009, and the gift tax exemption is to remain at 1 million. Also, both gift and estate taxes are to be repealed in 2010 unless Congress changes its mind.

This is just a short summary of the gift and estate tax process. If you have any questions, please consult with an estate attorney.