The season of giving is right around the corner, making this a very apt time to talk about the legal stipulations of giving gifts. Although we don’t want to scare you away from giving generously, it’s important to realize that some gifts are taxed and that you (the donor) must pay that gift tax. Gift taxes are often ignored, forgotten, or misconstrued, so this post is for all of you out there who are scratching your heads, wondering, “What are gift taxes?” and, “Am I supposed to pay taxes every time I give a birthday or holiday present?” Today we’re going to clear up some misconceptions surrounding gift taxes and answer FAQs.
What Are Gift Taxes?
So what are gift taxes? To answer this question, let’s go straight to the website of the Internal Revenue Service (IRS):
“The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.
“The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift” (source).
Who pays the gift tax?
The giver of the gift is responsible for paying the gift tax. Exceptions can be made to allow the receiver to pay the tax, but if you’re pursuing this method, you will need to talk with your attorney or a tax professional. The gift tax return is due on the IRS tax filing deadline (i.e., Tax Day, April 15th) the year after the gift is given.
What gifts are excluded from the gift tax?
Gifts to your spouse are not taxable, and gifts to a political organization are excluded as well. If you choose to pay for someone’s tuition or medical expenses, your gift will not be taxed. Finally, there is an annual exclusion for the calendar year, and you are allowed to give gifts up to that annual exclusion to each of your donees.
What is the amount of the annual exclusion?
The annual exclusion amount has changed over time to accommodate inflation. Prior to 2002, the annual exclusion was $10,000. It was raised to $11,000 for 2002-2005, $12,000 for 2006-2008, and $13,000 for 2009-2012. Finally, last year (2013) and this year (2014), the annual exclusion was/is $14,000. As you can see, the exclusion amount has been steadily increasing.
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If you are planning to make gifts within your estate plan, it is important you discuss your plans with an attorney so you fully understand the effects and logistics. For example, you will likely need to use transfer documents and prepare a gift tax return. Not only will your attorney help you prepare these documents, but they will also update you (and help you update your estate plan) if the laws regarding estates and gift taxes should change.
Do you need help creating or updating your estate plan? If you live in southwest Missouri, contact Parks & Jones, Attorneys at Law. We would be happy to help. Give us a call at 417-823-9898 or click here to schedule a free consultation.