Have You Made Taxable Gifts?
Many people make gifts to others, not knowing that doing so could have tax implications and could require the filing of a special gift tax return. After all, it's my money (or stuff) so I can give it away to whomever I want, right?
Well, yes, but if you give someone money or even other property, you may be subject to the federal gift tax. While most gifts are not subject to the gift tax, the following seven tips are good to know and can help you determine if your gift is taxable.
1. The general rule is that any gift is a taxable gift. A gift to your spouse, however, is not subject to the gift tax. 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 what is known as the "annual exclusion" for the year.
For 2012, the annual exclusion was $13,000 and it is $14,000 for 2013.
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, a common question I get is whether or not that person will have to pay income tax on the value of the gift received? The answer is no, income tax is not due on the receipt of a gift.
4. Making a gift does not ordinarily affect your income taxes. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).
5. There are other exceptions to the general rule that any gift is a taxable gift. The following gifts, in addition to those discussed earlier, are not taxable gifts:
- Tuition or medical expenses you pay directly to a medical or educational institution for someone,
- Gifts to a political organization for its use, and
- Gifts to charities.
6. Gift Splitting - you and your spouse together can double the amount of the gift made to someone else without it exceeding the annual exclusion. The gift can be considered as made one-half by you and one-half by your spouse.
Thus, for 2012, a married couple could make a gift up to $26,000 and for 2013 a gift up to $28,000 to a third party without making a taxable gift.
It is important to note that if you split a gift you made, you will need to file a gift tax return to show that you and your spouse agree to use gift splitting. You should file 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. Gift Tax Returns - 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.
Just because you have to file a gift tax return doesn't necessarily mean you will owe gift tax. You are allowed to offset any gift tax that is determined by the some of your lifetime exclusion under the estate tax law (a topic for another time). However, you still must file the gift tax return if required to do so as discussed earlier.
