Gifts and tax responsibility
Monday , December 23, 2013 - 3:11 PM
The IRS announced Friday that tax season begins on Jan. 31. At this time taxpayers may begin to either e-file or paper file their returns. E-filed returns are usually the fastest way to get your refund.
Although there is no income tax on gifts, there is such a thing as a gift tax. This tax is imposed on the donor. The person receiving the gift does not have to pay this tax. In addition, the person giving the gift does not receive a deduction for the gift on his/her tax return. However, if the donor does not pay the tax, the person receiving the gift may have to pay the tax.
There are situations in which a gift must be reported to the IRS by the donor. The annual exclusion for 2013 of a gift is $14,000. This means that if you give a gift of more than $14,000 to one person you will need to file a gift tax return. Filing the gift tax return does not necessarily mean you will pay a gift tax on the gift. There are exclusions that prevent the gift tax from applying. There is an unlimited exclusion for gifts to your spouse who is a U.S. citizen. There is also an unlimited exclusion for the payment of medical or educational costs, provided you make these payments directly to the service provider or educational institution.
If you give more than the annual exclusion amount to one person in a single year, you will have to file a gift tax return. But you still may not have to pay gift tax unless you gave a very large amount. The lifetime exclusion rule lets you give a substantial amount during your lifetime without ever paying a gift tax.
For 2013, the amount is $5,250,000. This amount is reduced by gifts that exceed the annual exclusion amount. So for example, you have filed gift tax returns reporting a total of $250,000 in gifts given over your lifetime that exceeded the annual exclusions. The $250,000 reduces your lifetime gift exclusion of $5,250,000. This amount changes annually, so it is important to track gifts over the annual exclusion to properly calculate your remaining lifetime gift exclusion. This amount counts against the estate tax exclusion which is another topic.
Another situation in which you must report a gift to the IRS is if the gift is of a future interest. A gift is considered a future interest if the donee’s rights to the use, possession, and enjoyment of the property or income from the property will not begin until some future date. In this situation, the donor must pay gift tax on the value of the property given. For example: Ted owns a house worth $150,000. On Oct. 5, 2013, Ted conveys title to the house to a close friend (non-family member) while retaining a ‘life use.’ Ted does not receive any money or other type of payment from his friend. Ted has made a gift of a future interest to his friend.
You must file a gift tax return to split gifts with your spouse (regardless of the amount). It is important to know when to file a gift tax return as there are penalties associated with late filing and non-filing of a gift tax return. A gift tax return must be filed no earlier than Jan. 1 following the year the gift is given and no later than April 15.
For more information concerning gift taxes visit http://www.irs.gov/pub/irs-pdf/i709.pdf
Tracy Bunner is an enrolled agent and tax preparer with an office in Harrisville. She can be reached at 801-686-1995 or at firstname.lastname@example.org.