Our Alabama clients have many estate tax issues. But one question that comes up is the Alabama gift tax. No estate plan is complete without addressing gifting strategies.
If you live in Alabama, this post will cover how the gift tax works and review some rules and requirements. Gift tax laws can be challenging, so let’s get started.
Table of contents
What is the gift tax exemption?
First, let’s define what a “gift” actually is from an IRS standpoint. A gift happens when a person gives something of value to another person and receives nothing in return. A gift can also result when the giftor receives back something worth less than what was given.
The IRS assesses a gift tax when a gift is made that exceeds the annual exemption. Most gifts are made in cash, but they are also made with property, like stocks, business holdings, mutual funds, boats, cars, and other personal items.
What is the Alabama Gift Tax?
Let’s discuss the issue at hand. Alabama does not impose a gift tax. The state also does not restrict or limit lifetime gifting. The gifts you make during your life will lower your estate.
But remember that the federal gift tax can still be assessed. That’s what careful planning is so critical.
What about the federal gift tax and exemption?
IRS rules allow a person to give away up to $15,000 to any person each year. This gift can be made to any number of people, and there is no tax filing requirement. In addition, the gift does not count against the lifetime exemption amount.
For example, assume that a couple has three kids, and they each give $15,000 to each kid. This is $45,000 per spouse and $90,000 for the couple.
IRS Form 709: Gift Tax Return
So let’s review the gift tax return process. IRS Form 709 is the gift tax return that reports gifts made over the annual exclusion amount.
For example, let’s assume you give $28,000 to your son. Since the gift is above the annual exemption, the IRS considers it a taxable gift. This results in the following:
- Form 709 must be filed to report the $13,000 amount that is over the annual exclusion.
- No gift tax is levied as long as the gift did not exceed the lifetime exemption.
How to Avoid the Alabama Gift Tax
As you know by now, Alabama does not impose a gift tax. But the federal gift tax could still be an issue for you.
There are a few strategies that can be implemented to reduce your taxable estate. Here are some ideas:
- Crummey Trusts
- Family Limited Partnerships (FLPs)
- Qualified Personal Residence Trusts (QPRTs)
- Special Valuation for Farms and Businesses
- Minor Trusts
- Charitable Remainder Trusts
- Lifetime Gifting
- Grantor Retained Income Trusts
- Grantor Retained Annuity Trusts (GRATs)
- Grantor Retained Unitrusts (GRUTs)
Hopefully, you have a good understanding of how the federal gift tax works. Fortunately, it will only impact less than 1% of Alabama residents. But folks with significant estates need to pay close attention.
Gifting strategies are an essential step in estate planning. Make sure you develop a strategy with your CPA, financial advisor, and attorney before you are stuck with a large estate tax bill.