Tuesday, April 21, 2015

Taxes on Gifts: Tips for Understanding the Rules



People are often confused about the laws that apply when they make a gift. Some are surprised to learn that gifts are regulated at all. Unfortunately there are rules - both in terms of taxes and Medicaid qualification. And the laws are complicated.  
Adding to the confusion - the tax rules related to gifts are very different from the rules that apply to Medicaid eligibility. This article discusses the tax rules. See my earlier blog post: Don’t Confuse Medicaid Rules with Tax Rules, for more on the Medicaid disqualification rules that can apply when you make a gift.
Here are some tips that should help you understand whether your gift is going to taxable. 

State Gift Taxes

In general gift taxes laws are federal not state. 
Most states do not tax gifts made from detached or disinterested generosity. However, transfers of cash or property in payment for services, or as an inducement to perform services, may be subject to state (and federal) taxes. 
As far as I am aware Connecticut is currently the only state that imposes a state gift tax. The Connecticut tax applies when the aggregate amount of the Connecticut taxable gifts made on or after January 1, 2005, exceeds $2 million. 
Pennsylvania residents should note, however, that gifts made within one year of the death of the donor are subject to PA inheritance taxes to the extent they exceed $3,000 per donee. A few other states also impose some form of so called “gifts-in-contemplation-of-death” rules similar to that of Pennsylvania. 

Federal Gift Taxes

Here are some useful tips (drawn from information provided by the IRS) about gifts and the federal gift tax.

1.    Nontaxable Gifts.  The general rule is that any gift is a taxable gift. However, there are exceptions to this rule. The following are not taxable gifts:
  • Gifts that do not exceed the annual exclusion (see below) for the calendar year,
  • Tuition or medical expenses you paid directly to a medical or educational institution for someone,
  • Gifts to your spouse (for federal tax purposes, the term “spouse” includes individuals of the same sex who are lawfully married),
  • Gifts to a political organization for its use, and
  • Gifts to charities.
2.    Annual Exclusion.  Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you give a gift to someone else, the gift tax usually does not apply until the value of the gift exceeds the annual exclusion for the year. For 2014 and 2015, the annual exclusion is $14,000.

3.    No Tax on Recipient.  Generally, the person who receives your gift will not have to pay a federal gift tax. That person also does not pay income tax on the value of the gift received.

4.    Gifts Not Deductible.  Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).

5.    Forgiven and Certain Loans.  The gift tax may also apply when you forgive a debt or make a loan that is interest-free or below the market interest rate.

6.    Gift-Splitting.  You and your spouse can give a gift up to $28,000 to a third party without making it a taxable gift. You can consider that one-half of the gift be given by you and one-half by your spouse.

7.    Filing Requirement.  You must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, if any of the following apply:
  • You gave gifts to at least one person (other than your spouse) that amount to more than the annual exclusion for the year.
  • You and your spouse are splitting a gift. This is true even if half of the split gift is less than the annual exclusion.
  • You gave someone (other than your spouse) a gift of a future interest that they can’t actually possess, enjoy, or from which they’ll receive income later.
  • You gave your spouse an interest in property that will terminate due to a future event.

Further Reading:

Much of the information in this article is drawn from, Seven Tips to Help You Determine if Your Gift is Taxable, IRS Tax Tip 2015-51.
For more information, see Publication 559, Survivors, Executors, and Administrators.
See also, “Permanent” Gift and Estate Tax Rules Set By New Fiscal Cliff Law, Marshall Elder and Estate Planning Blog, January 10, 2013.

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