Flood: An overview of laws regarding the federal gift tax
A gift is any transfer for which you receive nothing, or less than fair market value, in return.
Fair market value is the price at which an asset would sell when there is a willing and knowledgeable buyer and seller. For example, if you hand someone a check for $1,500, that is a gift. And if your house would sell for market price $250,000 and you sell it to your child for $50,000, you have made a $200,000 gift to your child.
Lifetime gift tax exemption
Under current law, each of us can give away or leave up to $5.25 million in 2013 and $5.34 million for 2014 without owing federal gift and estate tax.
This amount is referred to as the lifetime gift tax exemption. The lifetime gift tax exemption is tied directly to the federal estate tax exemption so that if you gift away any amount of your lifetime gift tax exemption, then this amount will be subtracted from your estate tax exemption when you die.
Annual gift tax exclusion
The amount of a gift that is annually exempted from federal gift taxes, called the annual gift tax exclusion, is $14,000 for 2013 and 2014. This amount can be given away by an individual in any given year to an unlimited number of people free from any federal gift tax consequences. For example John could give Sue, Bill, Joe and Sally each $14,000, and it would not affect his lifetime gift tax exemption.
A taxable gift is a gift that is more than the annual gift tax exclusion. If you make a taxable gift – for example, you give your son $20,000 to help him buy a house – then you will need to file a gift tax return (IRS Form 709). The taxable gift will be the difference between the total gift of $20,000 less the annual exclusion of $14,000 – or $6,000. The taxable gift will reduce your lifetime gift tax exemption from $5.25 million to $5.244 million. No gift tax will be due until you have exhausted your lifetime gift tax exemption. A taxable gift also can occur by funding a trust, forgiving a debt, assigning a judgment, or assigning the benefits of a life insurance policy.
A check will be considered a completed gift for gift-tax purposes on the date the recipient of the gift deposits the check or presents the check for payment, as opposed to the date the check was written by the donor. As a result, you may want to make annual exclusion gifts as early in the year as possible. This will minimize the possibility of the gift not being complete until the following year.
An indirect gift may occur if you lend someone money and forgive an obligation to pay accrued interest on a loan, or if you make a below-market interest (or interest-free) loan. The lender is deemed to provide the funds to the borrower for payment of the interest, thereby creating a gift from the lender to the borrower and interest income to the lender.
Gifts to spouses
All gifts you make to your spouse are tax-free, as long as he or she is a U.S. citizen. If you or your spouse make a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift-splitting. Both of you must agree to split the gift. If you do, you each take the annual exclusion for your part of the gift. Currently, gift-splitting allows married couples to give up to $28,000 to a person without making a taxable gift. 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 even if half of the split gift is less than the $14,000 annual exclusion.
Gift tax exceptions
The gift tax does not apply to an amount you pay on behalf of an individual to a qualifying education organization as tuition for the education or training of the individual. The payment must be made directly to the educational institution. The gift tax does not apply to an amount you paid on behalf of an individual to a person or institution that provided medical care for the individual. The payment must be made directly to the care provider.
Generation skipping transfer taxes (GSTs)
The GST tax is imposed on direct transfers to beneficiaries more than one generation below that of the individual making the gift (transferor) – for example, to grandchildren – and on transfers involving trusts having beneficiaries more than one generation below that of the transferor. The GST tax is assessed in addition to any gift or estate taxes that apply to the transfer at the highest transfer tax rate (40 percent for 2013). Each individual transferor is allowed a lifetime GST tax exemption of $5.25 million in 2013 ($5.34 million in 2014), in addition to the lifetime gift tax exemption mentioned above.
As with all tax matters, you might wish to consult a CPA or competent tax preparer to ensure you are compliant with the law.
• Michael J. Flood, CPA, MST, is a partner with Caufield & Flood Certified Public Accountants in Crystal Lake. Reach him at 815-455-9538, firstname.lastname@example.org, or CFCPAS.com.