Gift Tax
Gift Tax
Since we are in the midst of Christmas, the ultimate season of giving, I think a very appropriate topic for this time of the year would be on the issue of “gift” tax. In fact, this time of year is also when I get the most questions about gift tax ~ inquiries from both the person receiving the gift as well as the person giving the gift.
When it comes to gifts, most of the time people’s initial reaction is that “If I receive a significant gift (i.e. cash, real estate property, etc.) from someone, the government will view that as income and will want ME to pay taxes on that.” This seems to be the logical assumption. However, contrary to common belief, the fact is that gifts are NOT taxable to the person receiving the gift. However, it could be taxable to the person who is giving the gift. A little counter-intuitive, but this is the rule.
Furthermore, the person giving the gift is required to file a gift tax return if the gift exceeds a certain amount (more on that to follow).
So when do I need to file a gift tax return?
In the US, you can give up to $13,000 per person each year without needing to file any paperwork or forms. A married couple can give up to $26,000 per person each year. Spouses can give unlimited amounts of gifts to each other. (This is what my wife reminds me of the most – that I am allowed to give her unlimited amounts of gift without any tax consequences. No pressure there!)
It is when you give gifts to any single person in excess of these annual limits noted above, then that’s when you need to file gift tax returns.
When will I be assessed a gift tax?
You will be assessed a gift tax when you have exceeded enough of your annual limit to max out on your lifetime tax exclusion amount (which is $1 million in 2013). OK, at this point, an example would be handy:
If you give $23,000 to your child in Year 1, then you would have exceeded your annual limit of $13,000 by $10,000. However, you are not taxed on that $10,000 just yet. The $10,000 will now count towards your lifetime tax exclusion amount (in this example = $1 million). Your remaining lifetime tax exclusion amount is $990,000. You would need to file a gift tax return in Year 1, to inform the IRS of the excess gift you gave and its effect on your lifetime tax exclusion. And that's it. There is no other tax impact on you in this example.
If you continue to give gifts in excess of the annual limit, you will be assessed a gift tax only when the cumulative excess amounts are greater than your lifetime tax exclusion.
One thing to note is that the annual limit is on a “per-person” basis of the person receiving the gift. So, you can give $13,000 to child A, and $13,000 to Child B without exceeding the annual limit. Also note that payments made directly to universities or hospitals on behalf of your child do not count as gifts for gift tax purposes. (So parents who are sending their kids to private universities can exhale).
How does this apply to me?
For most of us engaging in the normal giving/receiving activities (i.e. Birthdays, Weddings, Christmas presents), we generally do not have to worry about gift taxes – as our typical gift to any individual is usually well under the $13,000 annual limit. However, for many people who are thinking about passing down assets to their children or family members, this is often a question that would come up.
If you have questions about this topic, please feel free to make an appointment to discuss them with me.
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