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 info@gkmtax.com 

Tips to check if your gift is taxable

If you gave money or property to someone as a gift, you may owe federal gift tax. Many gifts are not subject to the gift tax, but the IRS offers the following eight tips about gifts and the gift tax.

1. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. 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. For 2011 and 2012, the annual exclusion is $13,000.
2. Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.
3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.
4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).
5. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts:

• Gifts that are do not exceed the annual exclusion for the calendar year,

• Tuition or medical expenses you pay directly to a medical or educational institution for someone,

• Gifts to your spouse,

• Gifts to a political organization for its use, and
• Gifts to charities.

6. You and your spouse can make a gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion
7. You must file a gift tax return on Form 709, if any of the following apply:
   • You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.

• You and your spouse are splitting a gift.

• You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.

• You gave your spouse an interest in property that will terminate due to a  future event.

8. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.