How Does the Gift Tax Work?

Tuesday Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

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The gift tax. I’m sure you’ve heard about it. I receive a lot of calls about it. But do you know what it’s all about?

What is a gift?

According to the IRS, a gift is “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”

In other words, if you give away something of value and don’t receive an equal value in return, you’ve given a gift. (So far, so good, right?)

Tax treatment of gifts

  • Gifts that you receive are not considered income, and
  • You don’t report them on your tax return no matter how large they are.
  • The tax applies to the donor.

At work, for example, you receive a year-end bonus of $1,000. That is not a gift no matter what you call it, because it was for services rendered.

The gift tax was enacted to prevent individuals avoiding the estate tax by transferring their estate before their death.

Exclusions from the gift tax

Here are some areas excluded from this tax:

  • Charitable contributions,
  • Gifts to a spouse,
  • Gifts to a political organization, and
  • Tuition made
directly

to the school, not to the person who this benefits. (Payments for books, school supplies, room and board, etc. don’t qualify for the exclusion.)

  • Medical payments made on behalf of someone else directly to the medical provider, and not to the person who this benefits. These allowable medical expenses include anything that would qualify as a deductible medical expense.
The annual exclusion

: you are allowed an annual gift tax exclusion of $13,000 to as many people as you want (including your accountant), without any reporting or tax consequences. A married couple’s exclusion is doubled to $26,000. This includes your aunt, uncle, brother, sister, next door neighbor, – anybody.

The lifetime limit

: Any amount you give in

excess

of the annual exclusion of $13,000 is counted against you lifetime limit of $1 million. If you exceed the $1M, then gift taxes will apply. If you don’t use the lifetime limit during your lifetime, a credit is allowed to offset your estate tax upon your death.

Gift Tax Returns and the Gift Tax Rate

A gift tax return is required if you exceed the annual $13,000 per recipient limit, but no tax is required until your reach the $1 million lifetime limit.

If you exceed that $1 million lifetime limit, your tax is the same as the estate tax. For 2009 it was up to 45%, for 2010 it was 0%, but for 2011 it could be back with a rate of 55%.

Tax Treatment of Assets: Gift vs. Estate

Gifts other than cash

: If you are given a piece of property or a stock, for example, for tax purposes, your basis, or tax cost, is that of the person giving you the gift. (Exception: If the value on the date you receive the gift is lower than the original cost, your basis is the lower value.)

Assets received through the Estate

: If you receive assets as part of an estate, your cost basis ‘steps-up’ to the value on the date of death.

Therefore, in the tax area, you will have a higher tax liability when you sell the gift because you are taking the owner’s basis.

Conclusion

There’s a lot more in this area than is covered here, but this is a basic summary. You’ll need to contact an expert is this field before you begin any gifting strategies. You may want to check out IRS Publication 950.

But at least now, you are ready for your first quiz?

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.

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