The current $5 million lifetime gift exclusion will reduce in 2013 if Congress does not act by 2012 or if it enacts a new law lowering the current gift tax exclusion. Some financial advisors and taxpayers are concerned the IRS may assess extra estate or gift taxes if Congress reduces the exclusion amount. To illustrate the concern, consider the following example: a taxpayer makes a $5 million gift in 2012, and the exclusion amount reduces to $1 million the following year. Whether the taxpayer owes additional taxes on the $4 million excess will likely depend on whether the taxpayer owes gift or estate tax on that amount. The taxpayer will not have to pay an additional gift tax on a later gift in 2013, but the IRS may successfully assess extra taxes on large 2011 or 2012 gifts by assessing extra estate taxes at the gifter’s death.
For more information on the potential IRS clawback in the form of extra estate taxes, see Marvin D. Hills, Clawback of the Gift Tax, AICPA, Sep. 1, 2011.
Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.
