Although Minnesota as a state does not impose any gift tax, individuals must follow a federal gift tax. A gift tax is a tax placed on the transfer of property, including money. In order to be a gift, the person makes the gift expecting nothing in return. The most typical example of a standard gift is a parent giving a child or children a monetary gift. Most things given to another person as a gift are subject to the gift tax; however, there are a few exceptions to this rule. In general, the following will not have a gift tax:
- Gifts that are not more than the annual exclusion for the calendar year. The annual exclusion is an amount of money or property that you can give away in a year that will not have a gift tax. Currently the annual exclusion is $13,000. For example, you can give $13,000 to your child and that money will not be taxed. If, however, you gift your child $15,000, $2,000 of that gift will be taxed. The annual exclusion applies to each gift. This means that if you have three children and in one year, you give each child $13,000, each one of those gifts will not be subject to the gift tax.
- Gifts that are for tuition or medical expenses, so long as the payment of those gifts is made directly to the educational or medical institution for someone else.
- Gifts to your spouse.
- Gifts to political organizations for its use.
- Gifts to charities.
According to the current federal law, each individual has a $5 million gift tax exemption through 2012. What this means is that within your lifetime, you can make gifts up to $5 million dollars without having to pay taxes on those gifts. This law is only in effect, however, until the end of 2012. If Congress does not act to extend the $5 million exemption, the exemption will return to only $1 million. In practice, when you make a gift that is greater than the annual exclusion, you can choose to pay the gift tax on that amount or use the exemption credit to avoid paying the gift tax. Each person is able to make up to $5 million in gifts without having to pay gift taxes. Even if you do not have to pay a gift tax, you still have to file a gift tax return for certain kinds of gifts. These gifts include:
- If you gave a gift to at least one person more than the annual exclusion
- If you and your spouse are splitting a gift
- If you gave someone a gift of future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future; or
- If you gave your spouse an interest in property that will be ended by some future event
You will not have to fill out a gift tax return for gifts that are for tuition or medical expenses, gifts to political organizations, or gifts to charities. If you are planning on giving a gift to someone or working on planning your estate, you should contact an attorney to help you consider the potential tax consequences of your decisions. Even without having to pay gift taxes, most individuals making gifts will still have to file a gift tax return. It may be complicated to understand the tax responsibilities that come along with simply trying to give a loved one a gift. Planning to give assets and money away as gifts can have a direct impact on estate planning as well. An attorney will be able to advise you on potential strategies and help you to reduce your tax obligations.