Thursday, 13 December 2012

Tips to determine taxability of gifts

When you  gift  money or property to someone you may owe tax on the value gifted. For tax purposes, a gift is a transfer of property for less than its full value. In other words, if not paid back, at least not fully, it is a gift. The federal gift tax exists for the main reason of preventing citizens from avoiding the federal estate tax by giving away their money before they die. When invoked, the federal gift tax is owed by the giver of the gift, the recipient never owes anything. There is usually no gift tax when given to one's spouse or a charity.
A federal income tax return is usually unaffected by making a gift to someone. The value of gifts other than deductible charitable contributions cannot be deducted.
The following gifts are considered to be taxable when they exceed the annual gift exclusion amount of $13,000 (as of 2012).
·         Checks
·         Adding a joint tenant to real estate
·         Loaning $10,000 or more at less than the market rate of interest. This rule does not apply to loans of $10,000 or less
·         Canceling indebtedness
·         Making a payment owed by someone else
·         Making a gift as an individual to a corporation
·         A gift of foreign real estate from a U.S. citizen 
·         Giving real or tangible property located in the United States

The following gifts are not taxable:
·         Gifts not more than the annual exclusion for the calendar year
·         Tuition or medical expenses paid directly to an educational or medical institution for someone
·         Gifts to one's spouse
·         Gifs to a political organization for its use and
·         Gifts to charities
In addition, there are certain transactions not considered as gifts, and hence, not taxable:
  • Adding a joint tenant to a bank or brokerage account or to a U.S. Savings Bond
  •  Making a bona fide business transaction

Payments to 529 state tuition plans are gifts, so one can exclude up to the annual $13,000 amount. In fact, it can go up to $65,000 in one year, using up five year's worth of the exclusion, if the individual agrees not to make another gift to the same person in the following four years.
Alongside one's spouse, one can make a gift of up to $26,000 to a third party without it turning taxable. The gift can be considered as made one-half by self and the other half by spouse. If splitting a gift, a gift tax return must be filed to show that the spouse was also in agreement to use gift splitting.
A Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) must be filed in certain cases.  The gift value given should be such that kiddie tax does not kick in.   To learn more please email 

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