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Gift tax exclusion: no back-scratchin’ allowed

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in Small Business Tax

Q. My brother and I both want to reduce our taxable estates. Can we give gifts to each other’s kids without paying gift tax? —Conshohocken, Pa.

No. The IRS has consistently voided cross-gift arrangements in the vein of “you scratch my back and I’ll scratch yours.”

Gifts between family members that are all form and no substance won’t qualify for the annual gift tax exclusion ($13,000 for 2009). Nevertheless, if you’re married, your spouse can join in tax-free gifts to your own children. For example, you can give each child up to $26,000 free of gift tax this year and for several succeeding years.

Tip: Similarly, you won’t qualify for the gift tax exclusion if you give a family member stock or cash with the understanding that it will be re-gifted back. (Estate of  Bies, TC Memo 2000-338)

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