2013 TAX LIMITS

TAX LIMITS

There is a Federal Gift Tax but it is not clearly understood by most Americans. Some folks even think they can get a deduction for a gift to a friend or relative. So you want to give money to your kids or grandkids but wonder about the tax implications; how much is tax free? Or, if the kids are in bad financial shape and given money, is it a deduction? Hopefully, this article will answer your questions.

The Gift Tax is paid by the person giving the gift, not the one getting the gift. Even if your child or grandchild is destitute, there is no tax deduction for a gift to them. However, under current tax law, there is a $ 1 Million Lifetime Exemption to the Gift Tax. In addition to the Lifetime Exemption, you can give $ 13,000 each year to as many people as you want without incurring any Gift Tax. This figure is indexed for inflation and goes up every year. A husband and wife may each give gifts so in that event, $ 26,000 may be given by a married couple.  Cash gifts are not the only kind that are subject to the Gift Tax.  If real estate, fine art or precious jewelry is given, they also fall under the same dollar limits as cash gifts.

One may pay the medical bills or educational costs of another person and those payments are not treated as being part of the Annual Exclusion or Lifetime Exemption. If you reimbursed someone for the tuition they paid or that was paid with a student loan, that amount will be subject to the $ 13,000 limitation. If you reimburse someone for medical bills they paid, it also will be subject to the limit. It is very important that the giver pay the bills directly to the doctor, hospital or school and not to the individual who owes the bill.

In this scenario a person could give their grandchild $ 13,000 directly tax free and pay the school tuition directly with no Gift Tax implications on either amount.

If gifts to any one person exceed the Annual Exclusion amount, then one must file a U.S. Gift Tax return, Form 709.  As gifts are made each year above the exclusion, the totals would count against the $ 1 Million Lifetime Exemption.  As long as the gifts don’t exceed $ 1 Million total, no tax is due.  Once gifts made above the exclusion each year total over the exemption, the Gift Tax must be paid at very steep rates of between 37%-45%.  Please see a CPA, EA, or Accredited Tax Advisor for help in the tax planning of gifts. 

IRS Circular 230 Disclosure: The discussion of U.S. federal tax matters contained in this article is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding valid penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter[s] designed to avoid payment of taxes due the United States. No “covered opinion” under IRS Circular 230 is provided by virtue of this article.

TAX LIMITS

There is a Federal Gift Tax but it is not clearly understood by most Americans. Some folks even think they can get a deduction for a gift to a friend or relative. So you want to give money to your kids or grandkids but wonder about the tax implications; how much is tax free? Or, if the kids are in bad financial shape and given money, is it a deduction? Hopefully, this article will answer your questions.

The Gift Tax is paid by the person giving the gift, not the one getting the gift. Even if your child or grandchild is destitute, there is no tax deduction for a gift to them. However, under current tax law, there is a $ 1 Million Lifetime Exemption to the Gift Tax. In addition to the Lifetime Exemption, you can give $ 13,000 each year to as many people as you want without incurring any Gift Tax. This figure is indexed for inflation and goes up every year. A husband and wife may each give gifts so in that event, $ 26,000 may be given by a married couple.  Cash gifts are not the only kind that are subject to the Gift Tax.  If real estate, fine art or precious jewelry is given, they also fall under the same dollar limits as cash gifts.

One may pay the medical bills or educational costs of another person and those payments are not treated as being part of the Annual Exclusion or Lifetime Exemption. If you reimbursed someone for the tuition they paid or that was paid with a student loan, that amount will be subject to the $ 13,000 limitation. If you reimburse someone for medical bills they paid, it also will be subject to the limit. It is very important that the giver pay the bills directly to the doctor, hospital or school and not to the individual who owes the bill.

In this scenario a person could give their grandchild $ 13,000 directly tax free and pay the school tuition directly with no Gift Tax implications on either amount.

If gifts to any one person exceed the Annual Exclusion amount, then one must file a U.S. Gift Tax return, Form 709.  As gifts are made each year above the exclusion, the totals would count against the $ 1 Million Lifetime Exemption.  As long as the gifts don’t exceed $ 1 Million total, no tax is due.  Once gifts made above the exclusion each year total over the exemption, the Gift Tax must be paid at very steep rates of between 37%-45%.  Please see a CPA, EA, or Accredited Tax Advisor for help in the tax planning of gifts. 

IRS Circular 230 Disclosure: The discussion of U.S. federal tax matters contained in this article is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding valid penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter[s] designed to avoid payment of taxes due the United States. No “covered opinion” under IRS Circular 230 is provided by virtue of this article.

There are several advantages to establishing a limited liability company (LLC) and many of these compensations revolve around the tax advantages. A LLC if often sought as a third alternative to forming a corporation or a partnership. Many corporations are formed because they offer attractive limits on the personal liability that the business may suffer due to debts or liabilities. Partnerships don’t offer the same kind of protection, but do provide better tax advantages.

A LLC works to combine both these features, providing protection against personal liability while also establishing solid tax advantages. In addition to these selling points, a limited liability company is also often preferable to either incorporation or the formation of a partnership because they provide more flexibility than corporations and also because the legalities involved in running tend to be less formal. It is this lack of formality that leads to the tax advantages inherent in a limited liability company.

When it comes to federal taxation laws, a LLC has much more flexibility for choosing particular tax advantages. The default choice when there is more than one owner is for the LLC to be treated like a partnership and file the same form, Form 1065. But a multiple-owner LLC can also choose to be treated as either a C corporation or an S corporation. A single-owner limited liability company can choose to be treated for tax purposes as either a sole proprietorship-which is the default choice made by the IRS-or as either a C corporation or an S

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