EA Continuing Education Overview for 2011 Rules on Gift Tax
Starting in 2011, enrolled agents must be aware of the new gift tax rules – until they are replaced with newer rules, as always seems to happen every few years. The first change is that lifetime gifts of up to $5,000,000 are permitted before the tax is required.
As all enrolled agents know from their EA continuing education, gift tax is always paid by the donors – not the gift recipients. Gift tax returns are often required even when no tax is owed. Keeping the public informed about this is an important social contribution for enrolled agents. It is also an optimal way for an EA tax practitioner to attract clients.
The only way to avoid reporting a gift is when it is less than the annual exclusion. This threshold is indexed to the cost-of-living. However, it remains at $13,000 for 2011 – the same as 2010. This allows anyone to give to another person up to $13,000 during a calendar year without having to count it against the $5,000,000 lifetime exemption.
Study for the enrolled agent examination covers the technique known as gift splitting. This permits a married couple to give a gift of twice the annual exclusion without incurring gift tax. The couple agrees to split the gift when filing their separate gift tax returns.
However, if one person gives more than the annual exclusion, the excess is reported on that individual’s gift tax return. It may be counted against the lifetime exemption of $5,000,000. But another important point covered in enrolled agent CPE is that the gift tax and estate tax are connected. Any part of the lifetime exemption that is used for gifts is no longer available for estate tax exemption.
Unfortunately, the $5,000,000 limit applied to the lifetime exemption is set to expire after 2012. This means that entirely new legislation is expected that will become part of future enrolled agent continuing education.
A summary of the general gift tax situation for 2011 is that annual total gifts to one person of up to $13,000 do not have a tax impact. Any excess requires filing of a gift tax return – although gift splitting and the lifetime exemption may eliminate any tax assessment.
A special rule applies for contributions to a 529 college savings plan. A lump sum gift to the 529 of a future student is non-taxable up to $65,000 when spread over five years. No other gifts to the same recipient may occur over those five years without imposition of gift tax. The $65,000 threshold is also indexed to the cost-of-living.
Other types of gifts that an enrolled agent knows are exempt from tax are gifts to charities or spouses as well as amounts paid for someone’s benefit directly to an educational institution for tuition or to a provider of medical services.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.