The Gift Tax Is Ridiculous
Let’s say you have a job and let’s say this job pays you well enough that you can send gifts to whomever you want. Let’s say one of these gifts is a hundred bucks to your cousin because he just had a confirmation, bar/bat mitzvah, or other such teenage celebratory rite where a hundred dollar gift would be appropriate. Let’s say the government decided that they wanted to start taxing you for that gift… wouldn’t you say that’s ridiculous? I mean you already paid income tax, state and federal, social security and medicare taxes on that money. Your employer also paid all the necessary payroll taxes on that money too, so why is the government entitled to take even more?
Well they are and the rule is that any gift amount over $10,000 $12,000 (thanks everyone!) made to anyone that is not your spouse is subject to a gift tax. If your spouse is not a US citizen, then the gift tax applies as well. The first million dollars you give over the annual limit is excluded from the gift tax.
Let’s say you gave $12,001 in gift money this year to your lucky cousin, your lifetime million dollar exclusion is decreased by $1, not $12,001. This million dollar exclusion is shared by your $2,000,000 estate tax exclusion, so after the generous gift to your cousin, you can only pass through $1,999,999 to your heirs tax free.
While the dollar amounts are high and it’s likely it may never affect you, I still think it’s ridiculous and unfair.
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There are 15 comments, add your thoughts now!
Not disagreeing with your main point, but quibbling about the amounts. The annual gift tax exemption has increased from $10,000 to $12,000. Have used the URL link for this reply to point to the IRS web page that discusses this.
I agree, it is absurd. There are also so many loopholes that make it dumb that such a thing exists.
1) Married and want to give another couple money? Give the Man $12k and the Woman $12k on Dec 31st. Have your sprouse also give the man $12k and the woman $12k on the same day. Then, do the same on Jan 1. You have now given them $96k tax free.
2) Charitable donations. I don’t know exactly how this works but there are some ways you can make yourself a charity and donate X dollars to it. Then have that charity give money to ‘people in need’.
There are others.
I’m not too concerned. I won’t be giving anyone a ton of cash anytime soon :).
I see the reason behind it though: imagine you employ someone around the house. Except instead of employing them, you “give” them money because they are so nice to you (they clean your house, mow your lawn, etc). When you think about it this way, it’s clear why gifts “need” to be taxed.
I agree Jim, would you in extension agree that the Death/Estate tax is silly?
I think Kurt makes a great point. The main reason for th Gift Tax is to allow enforcement of other taxes, mostly Estate and Income. When you start arguing about taxes it becomes an extremely slippery slope where you end up with no taxes or purely consumption taxes. I’m not anti-tax, far from it, I don’t think as a well off citizen that I’m unduly burdened. At the same time, I do think pure consumption (or VAT tax) system is on paper better. However from an implemenation stand point especially if you don’t want the VAT to be onerously regressive in nature can be a execution nightmare.
put it into a trust and don’t worry about it then.
I agree with your theory of double taxation. I see others pointed out the limits were higher than your post. Just thought I’d give you a link to the IRS where you can verify.
http://www.irs.gov/newsroom/article/0,,id=107815,00.html
Then, let me leave you with one thought - Forget about the gift tax limitations, create a trust and pass all your assets without taxation or legal fees.
Yeah… kinda…
Repeal the Estate Tax
Yeah, the gift tax exclusion is $12k, not $10k.
A note to those suggesting that the creation of a trust will avoid gift taxes. Talk to your local estate attorney. The most common type of trust that individuals and families draft, the revocable living trust does not avoid estate or gift taxes. In fact, it does not attempt to do so. It is a will substitute, intended to avoid or reduce probate.
For more information about the gift tax, the IRS site has a helpful brochure
http://www.irs.gov/pub/irs-pdf/p950.pdf
A married couple can make a $24,000 gift to anyone without tax liability. In addition, you can make up to the annual exclusion amount to any number of people. The exclusion applies to each individual person you give a gift to.
So a married couple in any given year could give $24,000 to a friend, $24,000 to his wife, and $24,000 without incurring a gift tax. Even if you do exceed the exclusion, you can apply for a unified gift credit and not owe a gift, which based on the 1 million limit ends up being somewhere around $340k in taxes.
If you don’t use up that $340k by the time you die, you can also apply it to reduce your estate taxes. Not sure how that works.
Of course I’m not a tax attorney so I may have misunderstood some things in the document.
correct about trusts. same goes for any other thing you are trying to not pay tax on…seek pro advice. there are many things you can do to avoid gift and estate taxes. if you have substantial assets that exceed your ability to give gifts to beneficiaries, then i’d seek an estate planner/lawyer/etc to go over specifics for your situation.
I have to disagree. Although I think the present tax system is far too complex, a gift tax is no more absurd than a wage tax or a sales tax. All three tax the transfer of financial wealth from one individual to another. At least with the wage and sales tax it is actually an even swap (work or goods for money) whereas the gift tax there is no quid pro quo. Since gifts, excluding charitable gifts, (theoretically) have little if any benefit to society compared to employment or the exchange of goods, wouldn’t it actually make sense to tax gifts even more than the other two.
[...] something that requires a little of preplanning because of gift taxes. The donor must pay gift tax on any gift over $12,000 in 2007, so if your parents can help then it will help their tax situation [...]
Another loophole would be for them to sell you something. A personal sale of any cheap little trinket. I’ve personally never had the gift tax situation, but a few others in which gift giving was not allowed, but in the opposite situation I’ve sold some friends things for say, $1.
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