How the Gift Tax Works

I want to give my granddaughter $13,000 this year. Do I need to pay gift taxes or document this gift on my tax return?

You don’t need to do anything as long as you limit your generosity to your granddaughter to $13,000 or less this year. That’s the magic number for triggering a gift-tax return. In fact, you can give up to $13,000 to as many people as you want in 2011 without filing a gift-tax return. The same annual gift-tax exclusion limit applies in 2012.

If you want to be even more generous, you can contribute up to $65,000 to a 529 college savings plan for your granddaughter and spread the contribution over five years without owing gift taxes, as long as you don’t give her any other gifts during that five-year period (see Helping a Family Member Save for College. But you must file a gift tax Form 709 to document the spread.

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Giving gifts during your lifetime permanently removes money or other assets from your estate, reducing any future estate tax -- something most people never have to worry about. Under current law, only estates of individuals who die in 2011 worth more than $5 million ($5,120,000 in 2012) are subject to federal estate and gift taxes. The limits are doubled for married couples. But the lifetime estate-tax exclusion is scheduled to revert to $1 million in 2013, and the rate will increase to a maximum 55%, up from the current 35% rate, unless Congress acts.