Health Insurance Online
Phone Icon
Call now to speak with a Licensed agent (866) 954-1892

Insurance Type:

Taking Care of Mom and Dad: Gifts and Taxes

Giving is a good tax-management strategy. And there are two ways that it works:

  • gifts to nonprofit organizations (qualified under section 501(c)3 of the U.S. Tax Code) are tax deductible, like money put in defined contribution retirement funds;
  • cash gifts to anyone -- including family members -- can reduce the size of your parents' taxable estate.

We'll talk about charitable giving later. First, let's consider how ordinary gifts work. When someone gives someone else money or property, the giver is subject to federal gift tax if the gift is more than $11,000 in one year. But gifts under $11,000 a year are tax-free.

Even if tax applies to gifts, it may be eliminated by the unified credit. The unified credit is an allowance that applies to both the gift tax and the estate tax. It's also the main tool that government uses to evaluate and tax estates or inheritances, establishing the applicable exclusion amount. But the unified credit is a onetime thing; any part of the allowance used against gift tax in a given year reduces the amount that can be used against gift or estate taxes later.

For 2003, the unified credit is $345,800 and the applicable exclusion amount is $1 million. Starting in 2004, there are separate unified credit and applicable exclusion amounts for gifts and taxable estates. The taxable estate unified credit and applicable exclusion amount will grow to $1,455,800 and $3,500,000, respectively, in 2009.

At its top level, the federal estate tax is 50 percent of an estate's value, so the tax bite can really hurt. It's a good thing to know the value of your parents' estate long before the taxman comes to collect. It can be hard to broach this topic, but keep in mind that your own inheritance can be at stake.

For now, most families avoid the estate tax either by having estates worth less than $1 million or by being smart enough to use gifts and trusts in a way that lowers their estate value beneath that number. In these cases, they don't have to pay estate taxes.

Google Plus One