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(Continued from previous article) Now, another thing we have to take up in discussing gift taxes would have to be the differences between the gift tax as an American transfer tax and the federal income tax treatment of gifts – because there IS a difference, and sometimes they can get confused for each other.

One important thing we have to remember is that according to US federal tax laws, most gifts are excluded from the computation of income tax; that is to say, an individual’s gross income does not at all include the value of any property they received by means of gifting, inheritance, legacy or testament. But, should said property generate ANY INCOME AT ALL, then tax must be paid by the recipient of the gift or inheritance. Also, any gift (in general) received from one’s employer – for the benefit of one’s self – is to be considered income. There are, of course, certain statutory exemptions to this rules, such as the de minimis fringe amounts and as awards or awards for achievement. Nevertheless, on the whole, gifts cannot by taxed as part of an individual’s gross income, but are taxed on the side of the individual who chooses to give the gift, and even then that’s only if he or she had gone over the annual exclusion for the calendar year.

While there are limitations such as the inability to transfer interest of a loss as part of the gift, gift taxes are supposed to help encourage generosity between two separate parties, not to mention balance out the distribution of wealth. This is precisely why gifts from employers are considered as income tax, because it is presumed that anything gotten out of the professional relationship cannot generate a gift (defined by American taxation law as anything gotten out of a “detached and disinterested generosity”) because there is the possibility of having a selfish ulterior motive belying the transferal in this type of case.

Another thing that has to remembered is that, in relation to what has been mentioned before – that any income derived from the gifted property is considered income and is thus regarded as taxable – the person receiving the gift will be taxed if he or she does not receive the property from another person as a gift and instead receives money derived from the property. In other words, income from the property, even transferred from one person to another, is still income, and will thus be duly taxed as taxable income. If this were not the case, then neither party would be paying a tax, which is really big as far as loopholes go.

In case you were wondering, by the way: no, you do NOT have to file a gift tax return annually UNLESS you go over your annual exclusion for the calendar year (and even then, the value only includes gifts given to persons who are not your husband or your wife). The only instances wherein you are expected to file your gift tax returns – Form 709 – apart from the one just mentioned, is if any of the following apply to you: you and your husband or wife are splitting the cost of the gift between yourself, you gave someone who is not married to you a gift of future interest that cannot be enjoyed until the considerable future, and if you gave your husband or wife an interest in property that will be halted at some event in the foreseeable future.

Also, you may also want to know that the unified credit (that which lets you pay less to no tax) on your gift tax in 2008 is three hundred and forty-five thousand, eight hundred dollars, and the use of this greatly diminishes not only the credit you would be able to use next year, but also the credit you will be able to use to diminish your estate tax. Again, the applicable exclusion amount of the gift tax is fixed at one million US dollars.

So how exactly do you figure out the amount to be paid (if any) for your gift tax? Well, first and foremost remember which gifts can be considered taxable – that is, the gifts to a person that are in excess of the annual exclusion for the calendar year, and anything else that falls under the category of taxable gifts. The total of your taxable gift – which means the amount that you get even after all the exclusions – will then be subjected to gift tax rates (specified in Form 709). The remaining amount, if you so choose, can be subtracted from your unified credit – so even if your unified credit would be diminished you would, at the very least, not be expected to pay your gift tax for the year.

That being said, we can now move on to the final type of transfer tax subject under federal taxation – the GSTT or generation-skipping transfer tax. In essence, the generation skipping transfer tax is a tax levied on gifts – whether this is a gift that is given “up-front” or transfers of trust – that are bestowed upon an individual who is more than one generation younger than the individual giving out the gifts. Obviously, this tax is most often applied to gifts bestowed by grandparents upon their grandchildren. This tax, however, is rarely imposed: it only comes into effect in the event that a gift or estate tax fails to apply to all the generations.

To clarify special cases: if a trust was bestowed upon the giver’s child and his child’s child, the income derived may be given to each of them according to what they need. Once the child of the donor passes away, the principal of the trust would be immediately transferred to the grandchild of the donor. In the case of that particular property not being applicable to estate tax at the time of the donor’s child’s passing, then the even of the passing and the transfer of the principal of the trust would warrant a generation-skipping transfer tax. Otherwise, any gift directly given to someone more than one generation younger than the benefactor may be subject to generation-skipping tax.

To be sure, a direct generation skip or transfer occurs (either in your lifetime or your passing) when the property in question is seen as subject to an estate or a gift tax, is of an interest in terms of property and when it is (obviously) made to skip a generation.

As was said before, the generation-skipping transfer tax is rarely imposed – thankfully enough, as it is rather confusing to try and understand at first glance. But there are a few things that you must remember just in case you find yourself facing the possibility of having to deal with the generation-skipping transfer tax: it is imposed on a flat rate, a flat rate which is determined by the highest marginal estate and gift bracket AT THE TIME OF THE GIFTING. At the moment, the flat rate happens to be fixed at forty-five percent. Also, each individual taxpayer is given (as of now) the benefit of a two million dollar exemption from the generation-skipping transfer tax. The sum of all gifts given to individuals belonging two or more generations younger than the individual bestowing the gift that are in excess of this exemption are – you guessed it – subject to the generation-skipping transfer tax. If you are, however, half of a married couple, you would be happy to know that you and your husband or wife may combine your total exemption and have an exemption of four million American dollars applicable to the generation-skipping transfer tax. Of course, the exemption is expected to increase in 2009 (next year), and become unlimited by 2010. Still, that might not happen, and it’s best that we are aware of the current state of affairs instead of expecting the future to come earlier.

As with all taxes, there are benefits to using the exemptions – that is, apart from the diminished or eliminated taxes. When one uses the generation-skipping transfer tax exemptions to create a trust while their child is still alive, they leave a transfer tax-free trust that could have a value as high as four million dollars in property or cash to their grandchildren. What this means is that the grandchildren, upon the death of their parents, will not be expected to pay any sort of transfer tax. Furthermore, the trust could not be touched by creditors, and (for the most part) ex-husbands or ex-wives. The outright inheritance of the benefactor’s children of the property would have left that trust vulnerable to claims such as those just stated.

Calculating the generation-skipping transfer tax is also not as headache-inducing as some might think it to be: you simply need to be aware of the value of the gift or inheritance bestowed upon the person of the “skip” generation and subtracting any generation-skipping tax exemption before applying the maximum estate tax rate on the year of the transfer. Any other information you might need would be found in the applicable forms for the filing of any transfer tax – found on the IRS website – or would be happily provided for you by estate tax professionals of good repute.

This, then, concludes our discussion on transfer taxes. (To be continued in next article)