Last Minute Tax Planning

This is the time of year that many people start last-minute tax planning. This year, because the estate tax was repealed for 2010 and the gift tax was reduced to 35%, last minute planning is even more important, and may really be last minute. There is a lot of uncertainty about whether Congress will retroactively reinstate the estate tax for 2010 and retroactively increase the gift tax to the scheduled 55% that will be imposed on January 1, 2011. While we don't recommend that anyone die before December 31 just to take advantage of the lack of an estate tax in 2010, gift planning should be considered.

Everyone can give up to $13,000 tax free to any other person, and the number of people to whom you can give $13,000 is not limited. Beyond that, if you want to give more to a single person, you have a $1 million lifetime exemption that was formerly tied to the estate tax exemption. To the extent you use the lifetime exemption for gifts, it isn't available to reduce the estate tax. If you choose not to use the lifetime exemption, gifts in excess of $13,000 are taxed at 35%. However, if the gift tax bumps up to 55% as scheduled on January 1, and especially if the estate tax exemption is lowered to $1 million, also as scheduled, it might make sense to give gifts this year and pay the 35% tax as opposed to using any part of the lifetime exemption or paying the 55% tax rate next year.

The prudent thing seems to be to plan for some gifts, but not actually make them until late December when Congress has adjourned for the year and any retroactive legislation might be a little clearer. Then consult with your tax professional.