Thinking of Giving and Gift Taxes
How and when is the gift reported? The IRS has a form, Form 709
, designated specifically for reporting the gift and it is due on or before April 15th
following the year the gift was completed.
A completed gift as opposed to a gift of future interest is one in which there are no strings attached and no expectation of getting the property back. A gift of a future interest is one that the recipient will not be allowed to enjoy fully for a number of years, for example a gift to an irrevocable trust where the beneficiary does not have the immediate right to withdraw and use the gifted property.
What about any tax implications for the recipient? Property is received at the tax basis of the grantor. So highly appreciated property may have a significant capital gains burden for the recipient one day when the property is sold.
What’s the difference between an exclusion and an exemption? The annual exclusion amount is $14,000 for 2013 and will remain $14,000 for 2014 per person except for gifts made to your spouse who is an United States citizen. Gifts made to a spouse, that is an United States citizen, are not subject to the exclusion amount. Married couples can combine their annual exclusion amounts for gifting to someone else. For example, if a married couple wanted to make a gift to someone else each of them could give up to the annual exclusion amount without having to paying any taxes. An exemption from gift taxes is the life time amount that a person can gift away from their estate without incurring any federal gift tax. Any lifetime gift tax exemption used will reduce the estate tax exemption of the person making the gift. The 2013 limit is $5,250,000.00 and this amount will increase in 2014 to $5,340,000.00. Tennessee abolished its gift tax effective January 2012.
To summarize; gifts greater than the annual exclusion amount are reportable but can be applied toward the life time exemption amount. However use of the lifetime exemption will reduce the estate tax exemption amount available at death. Gift taxes may not be due presently or ever, depending on the size of the overall estate. As always we recommend seeking the advice of an accountant or tax specialist for specific questions.
Another related area of confusion is the relationship of gift tax law and the penalties Medicaid may impose on gifts within the designated look back period. These are two completely separate aspects of the same action. Older persons considering gifting significant resources, not usual and customary holiday gifts, may need to take into consideration the implications of that gift on potential future public benefit needs.