What is the definition of a gift tax? What are the gift tax exemptions and stipulations? How to avoid gift taxes within the family, with tuituion expenses, medical expenses and chartiable organization donations?
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. In 2012, the exemption was $13,000 and in 2013 it moved to $14,000. If you give a gift valued over this amount your gift will be taxed at the current gift tax rate unless you utilize your lifetime gift tax exemption. Giving a gift over the annual exemption just mean you do not have to file a gift tax return. But don’t be intimidated by a gift tax return because you can elect your exemption and pay no gift taxes. Federal gift tax laws state that there is a lifetime deduction amount of $5.12 million in 2012 and only $1M in 2013. If you don’t gift the entire amount in the first year, the balance gets grandfathered in. So if in 2012 you only gifted $1M, in 2013 you will have a balance to gift an additional $4.12M. If you donate more that this amount in your lifetime than you will be subject to a fifty-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:
- Gifts made to pay for tuition and/or medical expenses
- Gifts to your spouse
- 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 Exempt
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 $39,000 from each individual (i.e. $13,000 per child x 3 children), for a total of $78,000 per year to the children. Now, instead of $13,000 per year, each child can receive $26,000 in gifts and both parents will still not be subject to paying any gift taxes in 2012.
Charitable Organizations
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.
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