While neither you nor your brother would be liable for income taxes on a cash gift, you might have to pay gift tax. The gift tax was envisioned as a way to prevent wealthy individuals from avoiding estate tax upon death. Smaller gifts are exempt from gift tax. However, even if your gift is genuine and not an effort to avoid taxes, if it is large enough you need to document it for the IRS.
For most gifts, you won't have to worry about taxes. The IRS allows you to give anyone you like, including your brother, $13,000 per year as of 2012. This can come in any form, from property to stocks to cash. If you are married, you and your spouse combined can take advantage of a double exclusion, or $26,000 per year to any individual.
If you want to give your brother a substantial cash gift, you can still avoid immediate taxation by using your unified credit. The unified credit is a lifetime exemption for gifts, rather than an annual one. However, it is non-renewable. Any amount you draw down from your lifetime unified credit will not be available to you upon your death. As of 2012, the unified credit allowed you to shield $5,120,000 from tax. If you have a high net worth, using your unified credit now means you'll lessen your ability to protect your assets from estate tax upon your death.
Gift Tax Rates
Gift tax rates mirror ordinary income tax brackets. If you are liable for gift tax, you'll have to pay the tax at your marginal income tax rate, which is the rate you pay on the last dollar you earn. As of 2012, the highest tax bracket was 35 percent, if you were married filing jointly with taxable income of over $388,350. The lowest tax bracket was 10 percent, for joint filers with taxable incomes of $17,400 or less.
From a tax perspective, giving a gift to your brother after you die is almost identical to making a gift while alive. Any inheritance your brother receives will be completely tax-free, although he may owe taxes on the future appreciation of any assets you leave him. If the size of your estate is above your available unified credit, you'll owe tax on the excess amount, although it would be technically considered estate tax rather than gift tax at that point.
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