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The Gift Tax Is Ridiculous

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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.

{ 22 comments, please add your thoughts now! }

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22 Responses to “The Gift Tax Is Ridiculous”

  1. EMF says:

    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.

  2. Kurt says:

    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.

    • Dark Space says:

      That’s silly logic. If you’re trying to get around paying the house cleaner taxes, just pay them in cash and don’t report it – why would you try to disguise it as a gift?

  3. CK says:

    I agree Jim, would you in extension agree that the Death/Estate tax is silly?

    • Over Taxed says:

      No — I it is not silly — IT IS UNFAIR!

      I work hard my whole life, and I pay a LOT of taxes on my estate. I pay income tax on every penny I earn to buy my stuff. I pay property tax. I pay sales tax. I already gave the government their fair share (arguably, more than their fair share).

      Who the hell in the government thinks they have the right to tax AGAIN what I already paid for? And tax it at a very high rate? By the time my kids inherit my estate, the government will have taken at least HALF of it away from me (unless of course I pay a good estate planner to help me plan appropriately to prevent my kids from loosing so much of what I leave them). Guess what, I’d rather pay the estate planner than let the government steal away what I worked for.

      These type of taxes are outrageous, and citizens need to stand up and fight back. The few voices yelling about them (like mine) are simply not enough to bring about fair reform.

  4. broknowrchlatr says:

    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 :) .

  5. dong says:

    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.

    • Over Taxed says:

      Consumption taxes — that is the right and fair way to do it. More than that, it is simple for the people and for the government. Too bad politicians don’t want simple.

      Further, it can be implemented just as easily as it writes down on paper.

      Think about it. If you have money you spend it and pay tax. If you don’t have money you don’t spend it, so don’t pay as much tax. Save money? No problem, at the time you (or your heirs) start spending that money tax will come out.

      Worried that the super-rich won’t pay enough and the poor will be over-burdened? Just have higher tax rate for luxury items, middle tax rate for general want items, and no tax for necessities.

      Course, the politicians will get involved and muddy up the waters — trying to argue over what is necessity and what is luxury. Politicians who want big government will want to make a million distinctions to squeeze as much dough out as possible. Politicians who what smaller government will want to keep it simple.

      In the end, small business will be damaged because the politicians will royally screw up the consumption tax idea. Small businesses will be unable to keep up with sales tax codes, driving their costs so high they shut the doors.

  6. Tim says:

    put it into a trust and don’t worry about it then.

  7. D says:

    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.

  8. Yeah, the gift tax exclusion is $12k, not $10k.

  9. LAMoneyGuy says:

    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.

  10. Chris says:

    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.

  11. Tim says:

    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.

  12. Brandon says:

    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.

    • Over Taxed says:

      OK, so let’s forget about dollar amounts and examine this rationally.

      First, let’s keep in mind that the company you work for does not pay tax on the wage they pay you. It is a tax-deductible expense to them. Only you pay tax on that money.

      You have a son. You give you son allowance from the money you already paid tax on — fair for the government to tax that allowance a second time?

      You give you son gifts regularly because he is your son, or for special occasions — again purchased with money you already paid tax on…and you get to pay sales tax on top of that. Fair for the government to take a third tax dip on those gifts?

      Your son turns 16 and you give him a car (OK, you give him your used car because you had your eye on that sweet red sport model). Per your logic you (or your son) should need to pay tax for the value of the car (gift) and also pay sales tax (again) along with the registration tax. Fair?

      The point here is that as individuals we have already paid the tax. When we give our stuff away (or die), we don’t get to deduct what we are giving away from our taxes like a business paying wages would. No indeed, the government takes a double heaping helping.

  13. Cara says:

    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.

  14. Herb the Swamp Rat says:

    I completely agree with you that the Gift Tax is pure nonsense. Along with many other Taxes where the Government ask for a portion of our money.

    The Great news is, there is a very easy way to get around all this… Simply use CASH.

    If you want to give someone a gift of $12001.00 you simply open your safe that you keep in the hidden room in your house. Count out $12001 in Beautiful Cash and gift wrap it in a nice box for Jimmy to open on this Celebration Day!!

    You also instruct him that he should not deposit more than $3000 at a time into his bank account per month.

    There you go, ZERO Tax rate!!

    • Over Taxed says:

      That would be tax fraud.

      But how bout this. Go get $500 face value legal tender collectable or precious metal containing coins. Give the $500 to whoever you want. Kindly suggest they may want to sell the coins rather than spending them.

      Now let’s see the IRS argue that you were not allowed to SPEND your legal tender coins at face value!

      Of course, whoever you gave the coins to might get stuck with capital gains if they do not handle disposal of the coins correctly.

  15. Daryl says:

    What happens after you hit your million dollar limit? what is the tax rate on the gift then?

    • cubiclegeoff says:

      I could be wrong, but I believe it’s your income tax rate. Except if it’s part of an estate.


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