Federal Gift Tax – When This Tax Has to Be Paid

Definition of a Gift

The IRS defines a gift as “giving property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. The gift tax applies whether the donor intends the transfer to be a gift or not.” In other words, if you make a transfer for which you receive nothing or less than the fair market value of the property in return, it is a gift. If you sell your house to a relative for less than the fair market value, the difference is a gift. A promise to make a gift is not enough and a gift must be made of your own free will voluntarily. The gift must be delivered and accepted without the ability to revoke it and be a present interest (you no longer retain control over the property). The gift transaction date is considered to be the date title passes, in the case of cash when the check is cashed. Taxable gifts are reported using IRS Form 709 where a running tally is kept that is used against your unified federal gift and estate tax lifetime exemption (the amounts are cumulative). If a gift is taxable, the donor, not the recipient pays the tax. A ?le of Forms 709 should be maintained through one’s lifetime.

Non-Taxable Gifts

A) The annual gift tax exclusion is $14,000 for 2014. This is the amount an individual may give, free of gift tax and without impacting his/her lifetime exemption, to as many individuals as he/she wishes. A married couple may double the amount. For example, a married couple may gift $28,000 to any one of their children; if a child is married they may gift $28,000 to their child (gift splitting) and their child’s spouse (totaling $56,000 cash or property at fair market value).

B) Tuition, if you pay it directly to the school (no other incidental expenses)

C) Medical expenses you pay directly

D) Gifts to your spouse (if your spouse is a U.S. citizen)

E) Gifts to a political organization for its use

F) Gifts to qualifying charities if not a partial interest (this can be very complex if trusts are involved)

2014 unified estate/gift tax exemption

Gift and estate taxes have a unified federal gift and estate tax lifetime exemption of $5.34 Million per individual for 2014 ($10.68 Million for a married couple); this is the total amount of taxable gifts and taxable estate property and that can be transferred without paying gift or estate taxes. A taxable gift is other than noted above (for example the excess of a gift from one person to another over the $14,000 annual exclusion is a taxable gift). A surviving spouse can add any unused exclusion of the spouse who died most recently to their own, enabling transfers of up to $10.68 million tax-free, if an estate tax return is filing on behalf of the deceased with this election made. Gifts made during your lifetime will reduce the unified tax exemption against your taxable estate at time of death. If you exceed the limit, you will owe tax of up to 40% on the amount in excess. Gift tax applies to lifetime taxable gifts; estate tax applies to property left at death. Gifts are generally valued at cost basis while estate property is valued at fair market value at date of death.

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