Gifting & Tax Law Definition
The Internal Revenue Service defines a transfer of money or property as a gift when the donor receives nothing or a price below market value in return. Unless a special arrangement is made, the donor is responsible for paying the tax. The recipient does not have to pay income tax on the gift. The purpose of this tax is to prevent people from gifting property before death to avoid paying the estate tax. However, estate taxes only apply to estates with a value over $3.5 million, as of 2009 tax law.
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Time Frame
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Since January 1, 2009, the IRS raised the annual gift exclusion to $13,000 per gift. Together, parents can gift an adult child up to $26,000 without incurring additional taxes. Since money given to minors by their parents is considered support, the tax applies only to adult children. Each person has a $1 million lifetime cap on non-taxable gifts. Gift taxes are payable to the IRS with the return for the year during which the gift was made.
Exclusions
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The tax law excludes several types of exchanges. In addition to gifts under $13,000, payments made for another's medical or educational expenses are not taxable. These expenses must be paid directly to the provider to qualify for the exclusion. Money exceeding the annual exclusion that is paid to an individual for medical or education-related expenses will be subject to tax. Gifts to spouses, charities and political organizations are also non-taxable.
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Appreciation and Fair Market Value
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When property or stocks are given, tax is due on the increased value. The value is calculated by taking the value of the stock or real estate, less the original purchase price. For items sold below market value, such as a car, the tax is based on the amount of the car's value less the recipient's purchase price.
Benefits
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Giving gifts above the exclusion amount can result in lower taxes for the entire family. In the case of property intended for an heir, bestowing the property before death will save taxes on the property's appreciation after the gift and prior to death. Gifting income-producing properties to a family member in a lower income bracket can result in an overall savings for the family. Also, gifts allow the donor the opportunity to monitor a child's behavior and teach fiscal responsibility.
Ownership
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Monies gifted to minors must be given outright to the minor or deposited in a qualified custodial account. Children have the right to dispose of money or gifts of property as they see fit after reaching adulthood. State law determines if this is at age 18 or 21. In addition, children's investment income is subject to tax after it exceeds $1,900 (as of 2010).
Warning
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According to the IRS, "laws on Estate and Gift Taxes are considered to be some of the most complicated in the Internal Revenue Code. For further guidance, we strongly recommend that you visit with an estate tax practitioner (Attorney or CPA) who has considerable experience in this field." In addition, tax laws are subject to change. Always consult the latest IRS publications before giving a gift.
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References
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