Wondering what a gift tax is? Strategic gift taxation planning can help to make sure that your objectives are accomplished without unnecessary complication or taxation. Knowledge is power, so we’re here to educate you on gift taxation in this two-part series, and address some frequently asked questions.
Generally speaking, 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 t be a gift or not. The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.
Here are some frequently asked questions regarding gift taxes:
Who pays the gift tax?
The donor is generally responsible for paying the gift tax. Under special arrangements, the done may agree to pay the tax instead. Please visit with your tax professional if you are considering this type of arrangement.
What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.
What can be excluded from gifts?
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts:
- Gifts that are not more than the annual exclusion for the calendar year.
- Tuition or medical expenses you pay for someone (the educational and medical exclusions).
- Gifts to your spouse.
- Gifts to a political organization for its use.
In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.
May I deduct gifts on my income tax return?
Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions). If you are not sure whether the gift tax or the estate tax applies to your situation, refer to Publication 559, Survivors, Executors, and Administrators.
How many annual exclusions are available?
The annual exclusion applies to gifts to each done. In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, $13,000 in 2009-2012, and $14,000 on or after January 1, 2013, the annual exclusion applies to each gift. The annual exclusion for 2014, 2015, and 2016 is $14,000.
What if my spouse and I want to give away property that we own together?
You are each entitled to the annual exclusion amount on the gift. Together, you can give $22,000 to each done (2002-2005) or $24,000 (2006-2008), $26,000 (2009-2012) and $28,000 on or after January 1, 2013 (including 2014, 2015, and 2016).
What other information do I need to include with the return?
Refer to Form 709, 709 Instructions and Publication 559. Among other items listed:
- Copies of appraisals.
- Copies of relevant documents regarding the transfer.
- Documentation of any unusual items shown on the return (partially gifted assets, other items relevant to the transfer(s)).
What is “Fair Market Value?”
Fair Market Value is defined as: “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent’s gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.” As per Regulation 20.20131-1.
These are just a few of the many questions that are commonly asked regarding gift taxation. Keep an eye out for the second installment in this series, where we’ll wrap up the FAQs.
