The following will provide an overview and some of the general federal rules on both the gift tax and income taxes due when various gifts are made. Certain gifts that are not taxable and tax filing requirements are also explored.
Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person (the donee) exceeds the annual exclusion for the year. For 2010 and also in 2011, the annual exclusion is $13,000.
Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year. Once again, the annual exclusion for 2010 and 2011 is $13,000.
Gifts of greater than $13,000 are subject to gift taxes when the person has given during their lifetime more than the lifetime gift tax exemption. In 2011 and 2012, the lifetime exemption is $5 million. So a person can give up to $5 million during their lifetime in addition to any annual donee exclusions they may claim before being subject to any gift taxes.
Note that recent tax provisions have unified the gift and estate tax credit. So if a person uses up some of their lifetime $5 million exemption, the amount used during their lifetime it is not available at their death. A gift giving program using the annual donee exclusion and the lifetime gift tax exclusion can result in significant tax savings to a family. However, you should consult with an estate or tax attorney before engaging in any tax planning strategies in this area.
Generally, the person who receives a gift will not have to pay a federal gift tax on receipt of such gift. Also, that person will not have to pay income tax on the value of the gift received. However, there are exceptions to this rule. If the gift is of a retirement benefit, an annuity or other forms of income called "income in respect of a decedent" there will be income taxes to be paid on these type of gifts or bequests.
Making a gift does not ordinarily affect the federal income tax of the maker (donor) or the recipient (donee). You as the donor cannot deduct the value of gifts you make to individuals. Remember you can deduct on Schedule A as an itemized charitable deductions gifts that you make that qualify as charitable contributions to tax exempt qualified charitable organizations. Remember that there are various adjusted gross income limitations on such gifts that vary depending on the charity and the type of assets gifted to such charity.
The following gifts are not taxable gifts:
(A) Gifts that are not more than the annual exclusion for the calendar year. The annual exclusion is $13,000 per donee per year for 2011.
(B) Tuition or medical expenses you pay directly to a medical or educational institution for someone. Certain rules apply and the amount can be unlimited if certain tests are met.
(C) Gifts to your spouse. This amount is unlimited.
(D) Gifts to a political organization for its use; and
(E) Gifts to charities, as discussed above.
You must file a gift tax return on Form 709, if any of the following apply:
(A) You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year
(B) You and your spouse are splitting a gift
(C) You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future
(D) You gave your spouse an interest in property that will terminate due to a future event.
This strategy will allow you and your spouse to make a gift up to $26,000 to as many donees as you wish without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, to take advantage of this gift splitting election even if half of the split gift is less than the annual exclusion.
You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.
The above is only an overview of the general rules in this area. In the right situation, gift giving strategies can generate a significant amount of tax savings to a family. However, additional details and rules need to be explored with your estate planning attorney before proceeding in this area.
Copyright © 2011 - Steven J. Fromm & Associates, P.C., 1420 Walnut Street, Suite 300, Philadelphia, PA 19102. All rights reserved.
Steven J. Fromm is an attorney, with an LL.M. in taxation from the NYU Law School, who limits his practice to tax and tax planning, wills, trusts, probate and estate administration. He is recognized by Martindale Hubbell with its highest rating of "AV PREEMINENT" for legal ability and ethical standards. Please visit his firm's website at www.sjfpc.com for more details on his practice areas and client recommendations. You can also visit his blog at http://frommtaxes.wordpress.com for other tax articles of interest and his Avvo profile for his legal guides and questions answered by him to help the public on various tax and estate matters.