When Are Gifts Taxable?
The new federal estate and gift tax provisions signed into law late last year have received considerable attention and may have created some confusion concerning the taxability of gifts. So, we thought it would be a good time to review some basic information on the annual gift tax exclusion.Most gifts are not subject to the gift tax. For example, there is usually no tax when you make a gift to your spouse or a charity. If you make a gift to someone else, the gift tax usually does not apply until the cumulative value of the gifts you give to that person during the year exceeds the annual gift tax exclusion. In 2011, the annual federal gift tax exclusion amount is $13,000. A federal gift tax return generally does not have to be filed unless you give someone, other than your spouse or a qualifying charity, money or property worth more than the annual gift tax exclusion.
If federal gift tax is due, it typically will be paid by the person making the gift. The person receiving the gift does not pay federal gift tax or federal income tax on the value of the gift received. However, the person making the gift will not be able to deduct the value of the gift on his or her federal tax return, other than gifts that are deductible charitable contributions.
Thus far, we have indicated that gifts (a) for not more than the annual exclusion during the calendar year, (b) made to your spouse, or (c) made to a qualifying charity, generally are not subject to the federal gift tax. In addition to these provisions, tuition or medical expenses you pay directly to an educational or medical institution for someone else are not subject to federal gift tax, either.
Caution: You cannot first give the money to an individual for the purpose of paying the end recipient. To avoid federal gift tax liability, the money must be paid directly to the institution.
Gift-splitting is a technique available to married persons wanting to individually make a non-taxable gift of up to $26,000 in a single year. For split gifts, the donor's spouse must elect to split the gift with him or her. The gift is considered to be made half by the donor and half by the spouse. When a taxpayer elects to split a gift, a federal gift tax return must be filed to show that the spouses agree to use gift-splitting, even if the split gift is less than the annual exclusion ($13,000 in 2011).
Application of and aspects concerning the gift tax, including the impact of the $5 million unified estate and gift tax exclusion (not covered in this article), can be daunting. So, please contact us to discuss the tax aspects of gifting or any other tax compliance or planning issue.