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Question: I have a client who wants to make a gift of $50,000 to her son. How much does she need to pay in taxes?
Answer: A gift of cash to a family member is not generally subject to extra income taxes for either the donor or the done. Neither is the gift income tax deductible.
Large gifts may be subject to federal or state gift taxes. The federal government allows a donor to make gifts of up to $14,000 in a calendar year to each prospective done without any gift tax consequences. These types of gifts are referred to as annual exclusion gifts. An annual exclusion gift requires no extra paperwork or tax filing by the donor.
If a donor wants to make gifts in excess of annual exclusion gifts, the donor can choose to use some or all of his or her lifetime exemption. A taxpayer in 2013 has a $5.25 million lifetime exemption. The taxpayer uses the lifetime exemption to shelter gifts that would otherwise be subject to gift taxes from those taxes. Any part of the exemption used to shelter gifts during lifetime reduces the amount of the exemption available against federal estate taxes at death.
The taxpayer is required to file a federal gift tax return for gifts that use up part of the lifetime gift tax exemption. Gifts in excess of the lifetime exemption amount are subject to federal gift taxes at a flat rate of 40%.
In the example described above, the donor’s first $14,000 of gift to her son would qualify for the annual gift tax exclusion. The other $36,000 of the gift would require her to file a gift tax return, and use up part of her lifetime exemption.
Until recently, Connecticut and Tennessee were the only two states that imposed a gift tax on large gifts made by residents. However, Tennessee recently repealed its state gift tax.
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