Friday, November 8, 2013

Don't Look a Gift Horse In the Mouth: All About Gifts & Taxes

Pic Courtesy: Google
It's the proverbial time of the year when there are a lot of gifts exchanged. Some are store bought, some gift cards & there are those who just get plain ol' cash. 

What constitutes a "gift" in the eyes of the Internal Revenue Service? 

  • You make a gift if you give property, including money, or the use of or income from property, without expecting anything of equal value in return. 
  • You also make a gift if you sell something at less than its full value 
  • There's a gift made if you give an interest-free loan or reduced interest loan


So then, what is gift tax? 

  • The gift tax is a tax on the transfer of property 
  • By one individual to another while receiving nothing, or less than full value, in return. 
  • The tax applies whether the donor intends the transfer to be a gift or not. 

When is no gift tax owed? 

  • Most gifts are not subject to the gift tax.
  • There is usually no tax if you make a gift to your spouse. 
  • There is no tax for gifts made to a charity. 
  • Pic Courtesy: Google
  • If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. 

What is the Annual Exclusion for Gift Tax for 2013 and What Are Not Considered Gifts ?  

  • $14,000 is the annual exclusion for gift tax for the year 2013. 
  • Tuition or medical expenses paid on someone's behalf as long as that is paid directly to the institution by the donor.
  • Gifts to your spouse.
  • Gifts to a political organization for it's use. 


When is a Gift Tax Return Filed & By Whom? 

Pic Courtesy: Google
A gift tax return (Form 709) is usually filed by the donor who is a US citizen or resident of the United States, in the following situations: 
  1. If you gave gifts to someone in 2013 totalling more than $14,000 (other than to your spouse).
  2. Certain gifts, called future interests, are not subject to the $14,000 annual exclusion and you must file Form 709 even if the gift was under $14,000. 
  3. A husband and wife may NOT file a joint gift tax return. Each individual is responsible for his or her own Form 709
  4. You must file a gift tax return to split gifts with your spouse (regardless                                                 of their amount).
  5. If a gift is of community property, it is considered made one-half by each spouse. For example, a gift of $200,000 of community property is considered a gift of $100,000 made by each spouse, and each spouse must file a gift tax return. 
  6. Each spouse must file a gift tax return if they have made a gift of property held by them as joint tenants or tenants by the entirety.
Gift tax paid cannot be deducted on your federal tax return. In fact, gift taxes are completely separate from your income tax return. 

Bibliography: irs.gov; Publication 950; Form 709 & Instructions

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 
More of my contact information is on my website, www.mntaxsolutionsllc.com