It’s that time of year when you decide to give presents or money . . . or even make those end-of-year-last efforts to give donations and contributions.
For some gift giving will be a luxury this year while for others, it will be a welcome relief from shopping, traffic and crowds. Whichever category you find yourself in, I hope you find a way to celebrate the season with family and friends in a special way!
Here is some information to help you make those kinds of choices.
Some of this information is technical and I would advise anyone to seek out the services of their CPA, Tax Attorney or Tax Advisor for specific, relevant advise or cash gift giving information.
You cannot deduct contributions made to specific individuals, political organizations and candidates, the value of your time or services and the cost of raffles, bingo, or other games of chance.
To be deductible, contributions must be made to qualified organizations.
Organizations can tell you if they are qualified and if donations to them are deductible.
IRS.gov has an exempt organization search feature to help you see if an organization is qualified.
IRS Publication 78, Cumulative List of Organizations, lists all charitable organizations except those most recently granted tax exempt status. Pub. 78 is available online and in many public libraries. Alternatively, contact your local CPA, tax advisor, or tax attorney for more information!
If you gave any one person gifts valued at more than $13,000, it is necessary to report the total gift to the Internal Revenue Service. You may even have to pay tax on the gift.
The person who received your gift does not have to report the gift to the IRS or pay either gift or income tax on its value.
You make a gift when you give property, including money, or the use of or income from property, without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.
In the United States, the gift tax is governed by Chapter 12, Subtitle B of the Internal Revenue Code. The tax is imposed by section 2501 of the Code.
A gift tax is a tax assigned to the transfer of an item or of ownership of property ‘gifted.’
When a taxable gift is made the tax is normally imposed on the the giving party unless that party retains an interest in the gift which stalls its complete transfer or consumption.
There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:
- Gifts that are not more than the annual exclusion for the calendar year
- Gifts to a political organization for its use
- Gifts to charities
- Gifts to one’s spouse
- Tuition or medical expenses one pays directly to a medical or educational institution for someone
Married people, both you and your spouse, can give separate gifts of up to the annual limit to the same person without making a taxable gift. Please contact your local CPA or Tax Advisor or Attorney for more information.
Generally, if an interest in property is transferred during the giver’s lifetime, then the gift or transfer would not be subject to the estate tax. In 1976, Congress unified the gift and estate taxes limiting the giver’s ability to circumvent the estate tax by gifting during his or her lifetime. Not to be confused with differences between estate and gift taxes such as the effective tax rate, the amount of the credit available against tax, and the basis of the received property.
There are also types of gifts which will be included in a person’s estate such as certain gifts made within the three year window before death and gifts in which the donor retains an interest, such as gifts of remainder interests that are not either: qualified, remainder trusts, or charitable remainder trusts. The remainder interest gift tax rules apply to the gift tax on the entire value of the trust by assigning a zero value to the interest retained by the donor.
Gift Tax Exemptions –
There are two levels of exemption from the gift tax. First, transfers of a present interest up to (as of 2009) $13,000 per person per year are not subject to the tax. An individual can make gifts up to this amount to as many people as he/she wishes each year. A married couple can pool their individual gift exemptions to make gifts worth up to $26,000 per couple per year without incurring any gift tax. A lifetime gifting limit of $1,000,000 (gifts above the annual exclusions) is allowed before a gift tax is incurred.
If an individual or couple makes gifts of more than the limit, a gift tax is incurred. The person or couple has the option of paying the gift taxes that year, or to use some of the “unified credit” that would otherwise reduce the estate tax. In some situations it may be advisable to pay the tax in advance to reduce the size of the estate.
In many cases, however, an estate planning strategy is to give the maximum amount possible to as many people as possible to reduce the size of the estate.
Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $1 million may be subject to a generation-skipping transfer tax – IF – certain other criteria are met.
When preparing to file your federal tax return, don’t forget your contributions to charitable organizations. Your donations can add up to a nice tax deduction if you itemize on IRS Form 1040, Schedule A.
The IRS reminds taxpayers that the rules for taking a tax deduction for donating cars to charities have changed this year. The American Jobs Creation Act of 2004 has altered the rules for the contribution of used motor vehicles, boats and planes after Dec. 31, 2004. Starting then, if the claimed value of the donated motor vehicle, boat or plane exceeds $500 and the item is sold by the charitable organization, the taxpayer is limited to the gross proceeds from the sale.
People who want to take a deduction for the donation of their vehicle on their tax return should take quite a few steps, but here is the most obvious:
- Check that an Organization is Qualified
- Taxpayers must make certain that they contribute their car to an eligible organization; otherwise, their donation will not be tax deductible. Taxpayers can search Publication 78 online to check that an organization is qualified. Publication 78 is an annual, cumulative list of most organizations that are qualified to receive deductible contributions. Publication 78 is also available in many public libraries. In addition, taxpayers can call IRS Tax Exempt/Government Entities
Customer Service at 1-877-829-5500.
- Be sure to have the organization’s correct name and its headquarters location, if possible. Churches, synagogues, temples, mosques and governments are not required to apply for this exemption in order to be qualified.
Please contact your CPA or tax advisor if you’re considering a car donation for your tax return!
When preparing to file your federal tax return, don’t forget your contributions to charitable organizations. Especially if you itemize on IRS Form 1040, Schedule A.
The treatment of a gift for purposes of the U.S. gift tax (the transfer tax) should not be confused with the treatment of gifts for other tax purposes. For example, for U.S. income tax purposes, most gifts are excluded (under Internal Revenue Code section 102) from the gross income of the recipient, and thus are not taxed as income. For the purposes of taxable income, courts have defined “gift” as proceeds from a “detached and disinterested generosity.
Gifts from certain parties will always be taxed for U.S. Federal income tax purposes. Under Internal Revenue Code section 102(c), gifts transferred by or for an employer to, or for the benefit of, an employee cannot be excluded from the gross income of the employee for Federal income tax purposes. While there are some statutory exemptions under this rule for the minimum fringe benefit amounts, and for achievement awards, the general rule is the employee must report a “gift” from the employer as income for Federal income tax purposes. The foundation for the preceding rule is the presumption that employers do not give employees items of value out of “detached and disinterested generosity” due to the existing employment relationship.
Income subsequently derived from any property received as a gift is not excludable from the income taxed to the recipient. In addition, under Internal Revenue Code section 102(b)(2), a donor may not circumvent this requirement by gifting only the income and not the property itself to the recipient. That means that a gift of income is always income to the recipient. Permitting such an exclusion would allow the donor and the recipient to avoid paying taxes on the income received, a loophole that Congress eliminated.
Filing a Gift Tax Return-Form 709
Generally, you must file a gift tax return on Form 709 if any of the following apply.
1.Excluding your spouse, you gave gifts to at least one person that are more than the annual yearly exclusion.
2.You and your spouse split a gift.
3.Excluding your spouse, you gave someone a gift that they cannot actually possess, enjoy, or receive income from until some time in the future.
4.You gave your spouse an interest in property that will be ended by some event in the future.
You do not have to file a gift tax return to report gifts to (or for the use of) political organizations and gifts made by paying someone’s tuition or medical expenses.
You also do not need to report the following deductible gifts made to charities:
1.Your entire interest in property, if no other interest has been transferred for less than adequate consideration or for other than a charitable use; or
2.A qualified conservation contribution that is a restriction (granted forever) on the use of real property.
To Repeat – Organizations can tell you if they are qualified and if donations to them are deductible. IRS.gov has an exempt organization search feature to help you see if an organization is qualified. IRS Publication 78, Cumulative List of Organizations, lists all charitable organizations except those most recently granted tax exempt status. Pub. 78 is available online and in many public libraries. Alternatively, contact your local CPA, tax Advisor or Tax Attorney for more information!
REAL LIFE EXAMPLES
Inflation adjustment. After 2009, the $13,000 annual exclusion may be increased due to a cost-of-living adjustment. See the instructions for Form 709 for the amount of the annual exclusion for the year you make the gift.
1. In 2009, you give your nephew a cash gift of $5,000. It is your only gift to her this year. The gift is not a taxable gift because it is not more (it is less) than the $13,000 annual exclusion.
2. You pay the $12,000 college tuition of your friend. Because the payment qualifies for the educational exclusion, the gift is not a taxable gift.
3. In 2009, you give $28,000 to your 25-year-old son. The first $13,000 of your gift is not subject to the gift tax because of the annual exclusion. The remaining $15,000 is a taxable gift. If you use the Apply the Unified Credit to Gift Tax*, you may not have to pay the gift tax on the remaining $15,000. However, you will need to file a gift tax return unless the gift was made from community property funds and is actually a gift one half from the father and one half from the mother.
If you or your spouse make a separate property 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 consent (agree) to split the gift. If you do, you each can take the annual exclusion for your part of the gift.
In 2009, gift splitting allows married couples to give up to $26,000 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 annual exclusion.
Unless a gift exceeds $26,000, then gifts by married couples from community property funds are not taxable and no reporting is required.
4. John and his wife, Chrissy, agree to split the gifts that they made during 2009 from inherited funds. John gives his neice, Liz, $21,000, and Chrissy gives her nephew, Art, $18,000. Although each gift is more than the annual exclusion ($12,000), by gift splitting they give these gifts without making a taxable gift.
John’s gift to Liz is treated as one-half ($10,500) from John and one-half ($10,500) from Chrissy. Chrissy’s gift to Art is also treated as one-half ($9,000) from Chrissy and one-half ($9,000) from John. In each case, because one-half of the split gift isn’t more than the annual exclusion, it’s not a taxable gift. However, each of them must file a gift tax return.
Applying the Unified Credit to Gift Tax
After you determine which of your gifts are taxable, you figure the amount of gift tax on the total taxable gifts and apply your unified credit for the year.
You do not have to pay any gift tax for 2009. However, you do have to file Form 709.You can get both instructions and form 709 at www.irs.gov
If you still have questions or feel confused I strongly advise you to seek the advice of your local CPA, your tax Attorney or your Tax Advisor. This information is not meant to advise you, it is provided for informational purposes ONLY. If you find yourself in a situation that you will be sharing a 4 x 6 barred room with a large, hairy, burly man who is named after a machine that smashes things then you are on your own . . . R E A L L Y.