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Income | Gift | Estate| Transfer

Gift Taxes

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.

  1. 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.

  2. 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.

  3. 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.

  4. Gift of Joint Property
    1. 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."

    2. 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.

    3. 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.

    4. 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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