Gift Tax Basics Part 1–Uncle Sam May Benefit From Your Gift Giving
Gift tax is a real thing and not knowing is NOT a valid defense or an excuse that the IRS will accept.
Next April, when you are filing your income tax return, don’t forget to also consider “Form 709”, which is the gift tax form. Is everyone required to file Form 709? Nope. However, there are actually a GREAT MANY people who SHOULD be filing this form each year who do not do so. As with other IRS-related items, these things don’t usually just go away and at some point, there comes a day of reckoning. Let’s consider some gift tax basics below.
You are permitted to give away up to $14,000 per year per person, or the equivalent amount of property. Any gift made to a person that exceeds this $14,000 threshold will be subject to gift tax of up to 40% on such amount exceeding $14,000. By the way, this $14,000 amount is adjusted periodically, but this is the amount for 2014 and will remain the threshold amount for 2015. The good news is that if you make a gift over $14,000 to a person in a calendar year, even though you are then required to file a “gift tax return”, most likely you will NOT have to pay gift tax, because you can tap into your lifetime exclusion amount to cover any gift tax that might be due. Using part of this lifetime exclusion amount is not without consequences, as it reduces the amount you can eventually pass to others without the application of estate tax or generation skipping tax (“GST”), but assuming the lifetime exclusion amounts stays at its current levels (adjusted each year for inflation), this is normally not an issue for most people.
Are you required to pay taxes on gifts you receive?
As the recipient of a gift, you are fortunate and you do NOT have to worry about income tax or gift tax on such a gift. This is true regardless of the value of the gift you receive and whether such a gift comes from parents, other family members or someone totally unrelated by blood or marriage. As the recipient of a gift, you are free from tax consequences, whether income or gift tax. It is the GIVER of the gift who is responsible for any applicable gift tax and also responsible to report such a “taxable gift” to the IRS by filing a Form 709.
When are you required to file a gift tax return?
If you make a gift that has a fair market value that exceeds $14,000 (or an aggregate of smaller gifts to a person in a calendar year that total more than $14,000), you are then required to file a gift tax return when you file your income taxes the following year. For example, if you give a series of gifts to your child during 2014 that total $20,000 in value (whether in cash or other assets), you should report this information to your accountant and have the accountant complete a gift tax return for you as part of your 2014 taxes. This is required even though you will likely be using a portion of your lifetime exclusion amount to avoid having to write a check to the IRS for gift taxes. So even though you don’t owe a gift tax payment, you are required to file a gift tax return, in part so that the IRS will then how much of your lifetime exclusion amount you are accessing during this tax year and the IRS then knows how much of your lifetime exclusion amount then remains. As noted above, you may have occasion to tap into this lifetime exclusion amount later in life, whether as a result of more taxable gifts, or in the context of GST or estate tax considerations during your life or at death.
There are many other considerations related to gift tax and we will address more of these gift tax concepts in later blog posts.