Income | Gift | Estate| Transfer
Generally, gift tax is due on money in excess of a certain amount
that is given away while you are alive. Currently you can give away
$11,000 a year to as many people as you want without paying additional
taxes. Some people mistakenly think that if they give away a large sum
of money they actually get to take a deduction on their taxes. In fact,
quite the opposite is true. If you give away a large sum of money you
may have to pay extra to give that money away. (See Unified Gift Tax
Rate Schedule in Appendix to this chapter.) That extra amount is called
the gift tax. The current law, pursuant to IRC Section 2503(B), allows
a donor to give away $11,000 of present interest gifts during any
calendar year to each person of his or her choosing. If all present
interest gifts made to a single person during the year do not exceed
$11,000, the donor has not made any taxable gifts to that person and
no accounting is required. Although a gift tax return is not strictly
necessary, IRS Form 706 should be filed to establish the value of the
gift and to start the IRS Statute of Limitations running. This is done
to prevent problems in the future if you are ever audited by the IRS.
- Present Interest and Future Interest Gifts
A present interest gift is an unrestricted gift for a person's
immediate use, possession, or enjoyment of property or any interest
in property. Outright gifts of cash, property or gifts of the
immediate income interest in a Trust or current life estate in
property would be examples of present interest gifts. One must
give up complete control of the asset in order for it to qualify
as a present gift. Giving $11,000 in cash to your child is an example
of a present interest gift.
Lifetime gifts of future interest do not qualify for the $11,000
annual gift tax exclusion. Future interest gifts include gifts of
remainder interests, reversions and other interests that will
commence in use, possession, or enjoyment at some future date.
Certain interests created in Trust and a life estate interest in
Real Property are examples of future interest gifts. The person
receiving the gift does not have use or enjoyment of the asset until
some future date.
- Gift Tax Exclusions
There are certain exclusions to the gift tax.
This means a gift made under certain conditions are excludable and
such a gift will not be considered taxable.
The first exclusion is for amounts paid to qualifying educational
organizations for tuition expenses of someone other than the donor.
This means that any expenses paid for college or other educational
institutions for a child would be excluded and not subject to gift
taxes. Additionally, a donor may pay "qualifying medical expenses"
for someone else and such expenses would not be considered taxable gifts.
There is one caveat. The payment must be made to the educational
institution or the medical provider and not to the child to qualify.
A gift of cash to the child who then uses it to pay the tuition or
medical expenses will not qualify for the exclusion and you may have
to pay gift taxes.
- Split Gifts
Gifts by a husband and wife may be made to a single
person -- a child, for example. A husband and wife can each give $11,000
a year to each of their children, tax-free. If the husband owns an asset
in his name only, his wife may join in his gift to a child. Together
they can give a $22,000 asset to that child as long as the other spouse
agrees to "split" the gift with the donor spouse. This is known as a
split gift. If done properly, no gift tax will be due on a $22,000 gift
by the one spouse who owns the asset.
- Gift of Joint Property
- Bank Accounts and Savings Bonds
The creation of the joint bank account by the donor is not a
gift at the time the account is created if the donor has a right
to withdraw the funds from the account at any time without the
consent of the donee/joint owner. This holds true for United States
Savings Bonds registered as payable to "A or B."
- Real Property
If real property is purchased and then a one-half
interest is quit claimed or given to another person (the donee), then
the gift is equal to one-half interest in the property. An example of
this would be if a parent owned property and then transferred the
property, using a Quit-Claim Deed, from himself to himself and his
son with joint right-of-survivorship. If this occurs, then a gift
has been made of one-half the value of the property. If the gift
value is more than $11,000, a gift tax return should be filed.
Depending on the size of the estate, no gift taxes may be due. If
the estate is in excess of $1,500,000 or the unified credit has been
used, taxes may be due for this gift. However, it is important to
establish the date and value of the gift to protect against an IRS
audit. Therefore, a 709 Gift Tax Return Form should be filed.
- Gifts between Family Members and Interest Free Loans
Besides the above mentioned gifts, interest free
and below market loans are also considered gifts. Any property transferred
at less than adequate and full consideration is considered a gift. Transfers
between family members are scrutinized closely and are presumed to be gifts.
Therefore, unless a transaction between family members can be shown to have
been "arms-length" and unless it can be shown that there was a "good faith"
intention to have a fair exchange, the transaction will be presumed a gift.
Having the necessary paperwork completed is essential to support an
arms-length, fair market value transaction.
- Gifts between Spouses
Since 1982, there has been an unlimited marital deduction
for both qualified lifetime gifts and transfers at death to a spouse. A person
may make gifts of any value to his or her spouse with no estate tax or gift
tax liability. There is no need to file a gift tax return to report gifts to a
spouse unless a Qualified Terminable Interest Property (QTIP) election is made.
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