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Scenario #1: Gifts of Cash and Cash Equivalents

Suppose your favorite aunt just sent her favorite niece a check for $15,000. Does the niece owe taxes on this money? No, but your aunt does.

Our tax law says you can give away only $12,000 to any one person in any one year; gifts above this amount are subject to the gift tax. Since she gave her niece $15,000, your aunt could be required to pay gift taxes on $3,000. How much is the gift tax? The same as the estate tax: It starts at 18% and climbs to 45%.

Now you see why the donor pays the gift tax and not the recipient: It prevents people from giving away all their assets during their lifetime in order to avoid estate taxes upon their deaths. As onerous as the $12,000 per-person per-year limit might seem, it’s not as restrictive as it first appears.

Take a married couple with three married children and five grandchildren. Grandma can give $12,000 to each of her three children ($36,000), to each of her children’s spouses (another $36,000) and to each grandchild ($60,000). That’s $132,000. And Granddad can do the same thing, for total annual gifts of $264,000, all without incurring any gift taxes. On January 1, they can do it again. Thus, this family can transfer $528,000 to the kids in a remarkably short period of time. This in turn can be a big help if your goal is to reduce the value of your estate for estate tax purposes (which is the most common reason people make large repetitive gifts to family members).

Of course, making gifts to all these people might not be a good idea. If a divorce occurs, for example, the grandparents could discover that they’ve given perhaps $132,000 to an ex-daughter-in-law and her children, who they may never see again. Think carefully before using this strategy.

If you make a gift by writing a check during the holiday season, make sure the recipient cashes that check by December 31. The reason: The IRS considers gifts to be made in the year the check is cashed, not the year in which you write the check.

This could have a huge impact on you. Say you give your grandson $12,000 for Christmas this year, but he doesn’t cash the check until January of next year. If you give him more money next year, you’ll be subject to the gift tax, because he was slow in getting to the bank! If you’re trying to reduce your estate, make sure recipients of your checks cash or deposit them promptly.

Scenario #2: Gifts of Non-Cash Items

Would things be different if your aunt gave her niece a car instead of cash? No! If the value of the item is greater than $12,000, you’re still creating a gift tax problem.

Scenario #3: Gifts of Capital Assets

What if your aunt gave her niece some stock worth $15,000? Now what?

Not only would the gift tax issue remain, a new tax also would be under consideration: the capital-gains tax. Your aunt will pay a capital gains tax (or declare a capital loss) when she sells her stock. She avoids this tax if she instead gives the stock to her niece, which is a very nice tax break for her. But not for her niece. When you give away stock that has grown in value, the recipient of your stock receives your cost basis, too, meaning the niece, in this example, will pay the capital-gains tax when she sells the stock.

This obviously closes another tax loophole. There’s no way to avoid the tax merely by giving the stock away: Either she sells the stock and pays the capital-gains tax, or she gives the stock to the niece, who sells it and pays the tax. Either way, someone is going to pay the tax, and the IRS doesn’t really care who it is. The only way to completely avoid the capital gains tax is to give the stock to a charity.

If the donor's capital-gains tax bracket was higher than that of the recipient, it would make sense for her to give the stock to the niece and let the niece pay the tax. If the niece were in a higher bracket, the opposite would be true: Let the owner (your aunt) sell the stock, pay the tax and give the next proceeds to her niece. This is one area you need to discuss with your accountant or financial advisor.

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I believe in providing service to all my clients even after the mortgage closes. If you ever need assistance in dealing with any issues that you may run into, please let me know. Here are some of the ongoing services I can provide you:

• Evaluate any "low mortgage rate" offers you get in the mail or via email
• Assist you in obtaining a home equity loan or home equity line of credit should the need arise
• Help you properly manage the equity in your home to achieve the highest return
• Assist any friends, family or co-workers who may be in the market to buy a home or refinance their mortgage
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• Advise you when you may want to consider refinancing your mortgage based on prevailing interest rates, and your level of debt.

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