Federal gift tax: when this tax must be paid
Definition of a gift.
The IRS defines a gift as “giving property (including money), or the use of or proceeds from property, without expecting to receive something of at least equal value in return. Gift tax applies if the donor intends Whether the transfer is a gift or not.” In other words, if you make a transfer for which you receive nothing or less than the fair market value of the property in return, it is a gift. If you sell your home to a relative for less than fair market value, the difference is a gift. A promise to make a gift is not enough and a gift must be given of your own free will. The gift must be given and accepted without the possibility of revocation and be a present interest (you no longer retain ownership control). The transaction date of the donation is considered to be the date on which the title passes, in the case of cash, when the check is cashed. Taxable gifts are reported using IRS Form 709, where a running tally is kept and used against your lifetime exemption from federal unified gift and estate tax (amounts are cumulative). If a gift is taxable, the giver, not the recipient, pays the tax. An island of 709 forms must be maintained throughout life.
Non-taxable gifts
A) The annual gift tax exclusion is $14,000 for 2014. This is the amount a person can give, gift tax-free and without affecting their lifetime exemption, to as many people as they wish. A married couple can double the amount. For example, a married couple can give $28,000 to any one of their children; if a child is married, you can give $28,000 to your child (gift sharing) and your child’s spouse (a total of $56,000 in cash or property at fair market value).
B) Tuition, if paid directly to the school (no other incidentals)
C) Medical expenses that you pay directly
D) Gifts to your spouse (if your spouse is a US citizen)
E) Gifts to a political organization for its use
F) Donations to qualified charities if not a partial interest (this can be very complex if dealing with trusts)
2014 Unified Inheritance/Gift Tax Exemption
Gift and estate taxes have a unified lifetime federal gift and estate tax exemption of $5.34 million per individual for 2014 ($10.68 million for a married couple); This is the total amount of taxable gifts and taxable estate assets that can be transferred without paying gift or estate taxes. A taxable gift is different from the one listed above (for example, the excess of a gift from one person to another over the $14,000 annual exclusion is a taxable gift). A surviving spouse can add any unused exclusion of the most recently deceased spouse to their own, allowing transfers of up to $10.68 million tax-free, if an estate tax return is filed on behalf of the decedent with this election made. Gifts made during your lifetime will reduce the unified tax exemption against your taxable estate at death. If you exceed the limit, you will owe taxes of up to 40% on the excess amount. Gift tax applies to lifetime taxable gifts; estate tax applies to assets remaining at death. Gifts are generally valued at cost, while estate property is valued at fair market value on the date of death.
gift strategies
Donations made during your lifetime will reduce your taxable estate, if you donate assets before the event of your death, your estate will not be worth as much. This can be especially important if you are giving away property that will increase in value, such as stocks or closed business interests, fine art/collectibles, etc. At the same time, gifts in excess of the $14,000 annual exclusion reduce your estate tax exemption (they are unified as noted above). For example, if a married couple gives $250,000 in cash to an unmarried child over ten years, their estate will be worth $2.5 million less and their unified exemption will decrease from $10.68 million to $8.18 million.
As an example, if shares are given, totaling $250,000 fair market value at the time of the gift, however they were originally purchased for $100,000 (based on cost), the value of the gift is the $100,000 cost basis. . The shares at the time of the parent’s death can be worth many times more than $250,000, therefore, if the transfer was not made, it would increase the value of the estate and possibly the estate tax as ownership of the estate gets a ‘raise’ based on fair. market value at the time of death. Therefore, gifting valuable assets protects the gain from estate tax. If the recipient later sold the shares in the example, they would pay capital gains tax; in addition, the cost basis would include any gift tax paid on the transfer. Certain valuation discounts may apply to the value of shares/membership interest for closed deals, such as an FLP, due to lack of liquidity. You should obtain a professional appraisal at the time you transfer any asset other than cash or publicly traded securities, especially if it is an asset that is difficult to value, such as real estate or a share in the family business. .
A family limited partnership (FLP) can be an effective way to manage and control family assets while providing tax-effective transfer of wealth to others. Parents gift most of the partnership interests to family members in the form of limited partnership interests. The limited partners do not manage the partnership and the operating agreement may specify restrictions on the sale or loan against the interests of the partnership.
Another use of the annual exclusion is to put money into Section 529 college savings plans, setting up a separate account for each family member you want to benefit from.
Pay tuition and medical expenses without the payment being treated as a taxable gift to the student or patient, as long as the payment is made directly to the school or provider.
Talk to an estate and gift tax attorney regarding various irrevocable trusts you can gift on behalf of beneficiaries, such as a Grantor Retained Annuity Trust (GRAT), an irrevocable life insurance trust.
seedy notices
Typically, the annual exclusion is used to fund a trust such as an irrevocable life insurance trust. By doing this, the beneficiaries receive ‘Crummey powers’, which is the right for 30 or 60 days, to withdraw from the trust the annual gift attributable to that beneficiary. A Crummey notice must be sent each year to beneficiaries advising them of their right to withdraw their portion of the annual gift to the trust. The IRS in an audit can and will request them.
State Gift Taxes
Many states have estate or estate taxes and not all of them follow the federal estate tax system. This means that the state applies different tax rates or exemption amounts. The amount of the exemption for your particular state will vary. Consult with a CPA or estate tax attorney about specific state law and possible options for mitigating state or estate taxes.
same-sex marriages
The IRS states that “for federal tax purposes, the terms ‘spouse,’ ‘husband,’ and ‘wife,’ include persons of the same sex who were lawfully married under the laws of a state whose law authorizes the marriage of two persons of the same sex and who remain married. sex weddings”
Spouse who is not a US citizen
If your spouse is not a US citizen, you must file a gift tax return if your gifts to your spouse total more than $145,000 per year. Additional gifts to a non-citizen spouse count against your $5.34 million lifetime exclusion and must be reported on Form 709. Certain large gifts or bequests from certain foreign persons must be reported on Form 3520.
When to file Form 709
If you make gifts that exceed the annual exclusion, you must file Form 709, which is the United States Gift (and Generation-Skipping Transfer) Tax Return. The return is due on April 15 of the year after the gift, if you are on extension for Form 1040 (Form 4868), the extended due date applies to your gift tax return (October 15). To request an automatic six-month extension to file Form 709 without an extension for Form 1040, you can file Form 8892. If gift tax amounts are due, they are due April 15; if not paid on time, interest and penalties may result. Married couples cannot file a joint gift tax return. Each spouse files their own Form 709 for taxable gifts. Gifts can be “split” with your spouse, doubling the annual exclusion from $14,000 to $28,000 for any one person.
The current federal gift/estate tax rate is 40%.