IRS Gift Taxes
The law on gift taxes can often be confusing, in part due to the way the Internal Revenue Service defines a gift. In IRS terms, a gift sometimes includes additional forms of income or loans that one would not ordinarily consider gifts. When preparing taxes, it is important to have a sense of how the IRS defines gift taxes to determine if you are accountable for any.
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Definition
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According to the IRS, "The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not." It is important to consider all exchanges of property, whether given or received, when calculating taxes. Gift tax law often expands to include items sold for less than their original value, which complicates the process because they are not meant to be gifts.
Specifications
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The IRS further clarifies that, "The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return." In addition, "If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift." If you sell property at a reduced rate or let anyone borrow money, you may be held accountable for gift tax.
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Responsibility
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"The donor is generally responsible for paying the gift tax," explains the IRS. "Under special arrangements, the donee may agree to pay the tax instead. Please visit with your tax professional if you are considering this type of arrangement." Therefore, unless specifically advised otherwise by a tax professional, the donor should assume accountability for the gift tax unless the gift qualifies for exclusion.
Exceptions
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Many exclusions from gift taxation exist, so it is important to have your tax professional examine any gifts to determine if you are held responsible for them. The IRS lists several common exclusions, such as gifts that do not exceed the annual exclusion maximum, educational or medical fees that you pay for someone else, and gifts to a spouse or a political organization. Moreover, "gifts to qualifying charities are deductible from the value of the gift(s) made."
Considerations
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The IRS explains that, "Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax." Consequently, you cannot deduct gifts given on your income tax return. One must also consider the annual exclusion rate, which is the maximum value of a gift that can be given and excluded from taxation. As of Jan. 1, 2009, "the annual exclusion applies to each gift," the IRS states. Check the annual exclusion amount before giving large gifts, and especially before filing your taxes, to ensure that your gifts do not individually exclude the amount. The annual exclusion rate for 2009 was $13,000, but the amount changes each year to reflect inflation.
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References
- Photo Credit gift box. christmas gift. image by L. Shat from Fotolia.com
