Any time you give someone money or property you may be subject to
paying a gift tax. The federal government has established guidelines
for gift tax exemptions and gift tax rates for all property
transferred. These rates and exemptions can change on a yearly basis
and it is important to check with the IRS for updated gift tax laws.
Starting in 2006 the IRS determined that gifts under $12,000 per year
were exempt from federal gift tax, which is an increase from the
$10,000 limit set for years prior. If you give a gift valued over this
amount your gift will be taxed at the current gift tax rate of eighteen
percent. Federal gift tax laws also state that there is a lifetime
deduction amount of $2 million. If you donate more that this amount in
your lifetime than you will be subject to a forty-five percent gift tax
rate.
WHAT IS THE DEFINITION OF A "GIFT"?
In order for the government to consider your donation a "gift" it must
meet several requirements. First, your gift must be gratuitous. This
means that when you give someone something, such as a car, you do so
for less than the fair market value of the item. You cannot exchange or
receive goods for the fair market value because then it will be
considered a sale by the government and will not be exempt under gift
tax laws.
Your gift must also be complete and voluntary. This means that you
cannot retain control over the item you are transferring, and you must
be giving the gift under your own free will. If you are being court
ordered to put aside money for your children this is not considered a
gift. Lastly, the gift you make must be tangible. According to current
gift tax laws, an exchange of services is not considered a gift.
STIPULATIONS ON GIFTING FOR TAX EXEMPTIONS
As long as your donation is considered a gift according to the above
guidelines, and you keep the value of the gift below the annual limit,
you do not have to claim anything on your taxes. Keep in mind that the
annual limit is on a per person basis. You are allowed to give both
Little Johnnie and Little Susie gifts of up to $12,000 each per
calendar year and still be exempt from the federal gift tax.
You should also remember that the IRS counts the gift on the day your
check is cashed, not on the day it was written. Therefore you may be
liable for paying a gift tax if Little Johnnie didn't cash his check
until the following year, and you proceed to give him more money on
Christmas.
Most people will never have to pay a gift tax based upon the federal
guidelines previously mentioned. Several gifts are considered exempt
from the gift tax assuming they meet particular guidelines. The
exemptions, in no particular order, are as follows:
1. Gifts made to pay for tuition and/or medical expenses
2. Gifts to your spouse
3. Gifts to a charitable organization
TUITION EXPENSES EXEMPT FROM THE GIFT TAX
Both tuition and medical expenses must be qualified transfers to meet
exemption guidelines. Tuition payments to assist another individual
must be made directly to the qualified institution, not the individual.
Also, the money must be directed towards paying down the cost of
attending the school and not put towards books and supplies.
MEDICAL EXPENSES EXPEMPT FROM THE GIFT TAX
Medical payments are similar. In order to qualify for a gift tax
exemption the money must be paid directly to the medical facility and
not to the individual who received services as reimbursement. The money
gifted for medical expenses cannot be covered, and therefore
reimbursed, by insurance. Failure to adhere to these guidelines will
nullify your money as a "gift" since you will be receiving
reimbursement from the insurance company equal to the money you paid to
the medical facility.
AVOIDING GIFT TAX WITHIN THE FAMILY (BETWEEN SPOUSES AND CHILDREN)
Gifts between spouses can be unlimited. Additionally, spouses can pool
their annual exclusion limits to give a larger gift to an individual or
group of individuals. For example, a married couple with three children
will be allowed to gift $36,000 from each individual (i.e. $12,000 per
child x 3 children), for a total of $72,000 per year to the children.
Now, instead of $12,000 per year, each child can receive $24,000 in
gifts and both parents will still not be subject to paying any gift
taxes.
CHARITABLE ORGANIZATIONS AND THE GIFT TAX
Gifts made to qualified charitable organizations may also be unlimited.
Qualified organizations include foundations operated for the following
reasons: prevention of cruelty to animals or children; educational
purposes; scientific; literary; charitable; or religious. When filing
your income tax return you will have a separate section for listing
items which qualify for a charitable gift tax deduction.
Rocco and his team of bonded professional attorneys, CPAs and
accountants help affluent individuals and companies retain control of
their domestic and foreign/offshore assets, protect their assets, build
& preserve their wealth and financially structure their money to
reduce capital gains taxes, estate taxes, inheritance taxes, avoid the
probate process and decrease income taxes.
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Rocco Beatrice, CPA, MST, MBA, Award-winning trust & estate-planning expert
71 Commercial Street #150 Boston, MA 02109 tel: 508.429.0011 fax: 508.429.3034
Click here for more info: http://www.UltraTrust.com, http://ultratrust.com/grantor-trust.html
Disclaimer: All information on this site is provided for informational purposes only! By no means is any
information presented herein intended to substitute for the advice provided to you by any health care or other professional
or organization.
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