Definition of Gift
The IRS defines a gift as “the giving of property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. Gift taxes apply whether the donor intends the transfer to be a gift or not.” In other words, if you make a transfer for which you receive nothing or less than the fair market value of the property in return, it’s a gift. If you sell your house to a relative for less than fair market value, the difference is a gift. A promise to give a gift is not enough and a gift must be made voluntarily. Gifts must be sent and received without the ability to revoke them and be of current interest (you no longer have control of the property). The gift transaction date counts as the possession date, in terms of cash when the check clears. Taxable gifts are reported using IRS Form 709 in which a running tally is kept that applies to your unified federal gifts and lifetime property tax exemption (the amount is cumulative). If a gift is taxable, the giver, not the recipient, pays taxes. A Form 709 file must be maintained throughout a person’s life.
Tax Free Gifts
A) The annual gift tax exemption is $14,000 for 2014. This is an amount that a person can give, free from gift tax and without affecting lifetime exemption, to as many individuals as they wish. Married couples can double the amount. For example, a husband and wife may give $28,000 to one of their children; if a child marries, they can leave $28,000 to their child (prize sharing) and their child’s spouse (a total of $56,000 in cash or property at fair market value).
B) Tuition fee, if you pay it directly to the school (no other incidental fees)
C) Medical expenses that you pay directly
D) A gift to your spouse (if your spouse is a US citizen)
E) Rewards to political organizations for their use
F) A gift to a qualifying charity if not a partial interest (this can be very tricky if trusts are involved)
Integrated property/gift tax exemption in 2014
Gift and property taxes have a lifetime federal gift and property tax exemption of $5.34 Million per individual for 2014 ($10.68 Million for married couples); This is the total amount of taxable gift and property taxable and transferable without paying any gift or property taxes. Gifts are taxable other than those listed above (eg excess of a gift from one person to another over the annual exemption of $14,000 is a taxable gift). Surviving spouses can add an unused exemption from a recently deceased spouse to their own property, allowing transfers of up to $10.68 million tax-free, if a property tax return is filed in the deceased’s name with this election made. Gifts made during your lifetime will reduce the integrated tax exemption against your taxable estate at death. If you exceed the limit, you will owe up to 40% tax on the excess amount. Gift tax applies to gifts taxable for life; Property taxes apply to property left at death. Gifts are generally valued at cost while property is valued at fair market value on the date of death.
Rewarding Strategy
Gifts made during your life will reduce your taxable estate, if you gifted property before death your estate will not be worth as much. This is especially important if you are gifting property that will increase in value such as shares or closely held business interests, works of art/collectibles, etc. mentioned above). For example, if a couple gave $250,000 in cash to an only child for ten years, their estate would be reduced by $2.5 million, and their combined estate would be reduced from $10.68 to $8.18 million.
For example if stock was awarded, with a total fair market value of $250,000 at the time of grant, but was originally purchased for $100,000 (cost basis), the value of the gift would be a cost basis of $100,000. The shares at the death of a parent may be worth many times over $250,000, so if the transfer is not made it will increase the value of the land and possibly the land tax as the land property gets an ‘increase’ as a basis for the fair. market value at death. So gift-giving appreciates assets protecting gains from land taxes. If the recipient then sells the shares in the example, they will pay capital gains tax; also the fee base will include gift tax paid on the transfer. Certain valuation discounts may apply to share/membership values for closely held businesses such as FLP due to lack of liquidity. You will need to obtain a professional appraisal when you make a transfer for any asset that is not cash or publicly traded securities, especially if it is an asset that is difficult to value, such as real estate or stock in a family business. .
A family limited partnership (FLP) can be an effective way to manage and control family assets while providing a tax-effective transfer of wealth to others. Parents gift most of the partnership interests to family members in the form of limited partnership interests. The limited partners do not manage the partnership and operating agreements may specify sales or loan restrictions on their partnership interests.
Another use for the annual exemption is to put money into a Section 529 College savings plan, creating separate accounts for each family member you wish to benefit from.
Unpaid tuition and medical fees are treated as a taxable gift to the student or patient, as long as the payment is made directly to the school or provider
Talk to an estate and gift tax attorney about the various irrevocable trusts you can provide on behalf of a beneficiary such as a fixed annuity trustee (GRAT), Irrevocable Life Insurance Trust.
Crummey notice
Usually an annual exemption is used to fund a trust such as an Irrevocable Life Insurance Trust. In doing this, the beneficiary receives a ‘Crummey power’ which is the right for 30 or 60 days, to withdraw from the trust the annual gift made to the beneficiary. Crummey notices must be sent annually to beneficiaries informing them of their right to withdraw their share of the annual gift to the trust. The IRS under audit can and will require it.
State Gift Tax
Many states have property or inheritance taxes and not all of them follow the Federal property tax system. This means states apply different tax rates or exemption amounts. The number of exemptions for your state will vary. Consult a CPA or Property Tax Attorney about specific state laws and potential options for reducing state property or inheritance taxes.
Same-sex marriage
The IRS states “For federal tax purposes, the terms “spouse”, “husband” and “wife” include individuals of the same sex who are legally married under the laws of a state whose laws permit the marriage of two individuals of the same sex. sex and who remain married. Also, the Service will recognize marriages of individuals of the same sex that are legally formed under the laws of the state of celebration even if the married couple resides in a state that does not recognize the validity of same-sex marriages.”
Spouse of Non-US Citizen
If your spouse is not a US citizen, you must file a gift tax return if your total gifts to your spouse are more than $145,000 per year. Additional gifts to non-national spouses count towards your lifetime exclusion of $5.34 million and must be reported on Form 709. Certain large gifts or inheritances from certain foreigners must be reported on Form 3520.
When to file Form 709
If you provide a gift that exceeds the annual exemption, you must file Form 709, which is the United States Gift Tax Return (and Transfers Through Generations). Refunds are due by April 15th of the year after you make a gift, if you used an extension for form 1040 (form 4868), an extended due date applies to your gift tax return (October 15th). To request an automatic six-month extension to file Form 709 without an extension for form 1040, you can file Form 8892. If there is an outstanding gift tax amount, it is due by April 15, if not paid on time, interest and penalties may be incurred. Married couples cannot file joint gift tax returns. Each spouse files their own Form 709 for taxable gifts. Prizes can be “shared” with your partner, doubling the annual exclusion from $14,000 to $28,000 for one person.
The current federal gift/plantation tax rate is 40%.