How Do I Avoid Gift Taxes in Texas if My Parents Give Me a House?

Full Question:

When I graduated college, my parents purchased a house for me to live in. If my parents own the home that only I live in, and they would like to give it to me. How would we avoid the gift tax? Would I need to somehow purchase the home from them in order to avoid said tax? And if so, how would we go about it?
09/08/2011   |   Category: Taxes   |   State: Texas   |   #25479


Gift taxes are taxes that supplement the estate tax. Gift taxes are placed on gifts given away to any person while the giver is still living, so that the giver may not avoid estate taxes by making gifts of his or her estate. The annual exclusion applies to gifts to each donee. For 2011 and 2012, the federal estate tax exemption will be $5 million and the estate tax rate for estates above this amount will be 35%. The estate tax has also become united with federal gift and generation-skipping transfer taxes such that the lifetime gift tax exemption and generation-skipping transfer tax exemption will be $5 million. Gifts over these amounts to one person in one year are considered a taxable gift and generate a potential gift tax.

Most gifts above the annual exemption are still not subject to tax because each taxpayer is allowed a lifetime credit against taxable gifts and estate. This credit reduces or eliminates the amount of taxes owed. A unified credit applies to both the gift tax and the estate tax. The unified credit is subtracted from any gift tax owed by the taxpayer. Unified credit used against a gift tax in one year reduces the amount of credit that can be applied against a gift tax in later years. The total amount used against a gift tax reduces the credit available to use against estate tax. In other words, any unified credit not used against gift tax during the taxpayer's lifetime is available to reduce or eliminate an estate tax.

The recipient of a gift or an estate is not liable for the gift or estate tax. An estate's executor is responsible for payment of any estate tax that is due; the donor is responsible for payment of a gift tax, if one is due. Moreover, gifts and inheritances are not subject to income tax.

There are two levels of exemption from the gift tax, annual and lifetime. First, transfers of a present interest up to $13,000 per person per year (in 2011) are exempt from the tax ("present interest" is defined as: when the donee can "immediately and without restriction use, possess, or enjoy the gifted property", if it's not this "present interest" then it's a "future interest" and therefore the annual exclusion amount of $13,000 (2011) is NOT available to use as a deduction from the gift). An individual can make gifts up to this amount to as many people as he/she wishes each year. A married couple can combine their individual gift exemptions to make gifts worth up to $26,000 per recipient per year withoutbeing liable for any gift tax. For 2011 and 2012, the lifetime gift tax exemption is $5,000,000, which is equal to the federal estate tax exemption. The lifetime gift tax exemption is tied directly to the federal estate tax exemption such that if you gift away any amount of your lifetime gift tax exemption, then this amount will be subtracted from your estate tax exemption after you die.

If an individual or couple makes gifts valued at more than the limit, gift tax will be owed. There is also the option of paying the gift taxes that year, or to use some of the "unified credit" that would otherwise reduce the estate tax. Sometimes it's recommended to pay the tax in advance to reduce the size of the estate.

In many instances, however, an estate planning strategy is to give the maximum amount possible to as many people as possible to reduce the size of the estate.

Furthermore, transfers (whether by bequest, gift, or inheritance) over $1 million may be subject to a generation-skipping transfer tax if certain other criteria are met.

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