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 or proceeds of property, without expecting to receive something of at least equal value in return. Gift tax applies if the giver intends to 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 exchange, 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 made of your own free will voluntarily. The gift must be given and accepted without the possibility of revocation and be a present interest (you no longer retain control over the property). The date on which the title passes is considered as the transaction date of the donation, in the case of cash when the check is cashed. Taxable gifts are reported using IRS Form 709, where a running count is maintained and used against your lifetime exemption from Unified Federal Gift and Estate Tax (amounts are cumulative). If a gift is taxable, the giver, not the recipient, pays the tax. An island of forms 709 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, free of gift tax and without affecting their lifetime exemption, to as many people as they want. A married couple can double the amount. For example, a married couple can give $28,000 to any 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 partial interest (this can be very complex if trusts are involved)
2014 Unified Inheritance/Gift Tax Exemption
Gift and estate taxes have a unified federal lifetime 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 inheritance tax. 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 exclusions from 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 in the decedent’s name with this election made. Gifts made during your lifetime will reduce the unified tax exemption against your taxable estate at the time of 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 is applied to assets left at death. Gifts are generally valued at cost, while estate property is valued at fair market value on the date of death.
Gift Strategies
Gifts made during your lifetime will reduce your taxable estate, if you donate property before the event of your death, your estate will not be worth as much. This can be especially important if you are gifting assets that will increase in value, such as stocks or closed business interests, artwork/collectibles, etc. At the same time, gifts that exceed the $14,000 annual exclusion reduce your estate tax exemption (they are unified as noted above). For example, if a married couple donates $250,000 in cash to an unmarried child over ten years, their estate will be worth $2.5 million less and their consolidated exemption will drop from $10.68 to $8.18 million.
As an example, if shares are given, totaling $250,000 fair market value at time of gift, however 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 over $250,000, so if the transfer did not take place, it would increase the value of the estate and possibly estate tax as ownership of the estate increases. gets an ‘increase’ based on fair. market value at time of death. Therefore, giving away valuable assets protects the estate tax gain. 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 be applied to the value of the 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 a difficult asset to value, such as real estate or an interest in a family business. .
A Family Limited Partnership (FLP) can be an effective way to manage and control family assets while also providing for the transfer of wealth to others with tax effective benefits. Parents gift the majority of the partnership interest to family members in the form of limited partnership interests. Limited partners do not manage the partnership, and the operating agreement may specify restrictions on selling or lending against the partnership’s interest.
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.
Pay tuition and medical expenses without the payment being treated as a taxable gift to the student or patient, provided 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, 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 informing 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 potential options for mitigating state estate or probate 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 legally married under the laws of a state whose laws authorize the marriage of two persons of the same sex.” 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 noncitizen 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 present the 709 form
If you make gifts that exceed the annual exclusion, you must file Form 709, which is the United States Gift (and Skipping Transfer) Tax Return. The return is due April 15 of the year after the gift, if you are in deferral 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 anyone.
The current federal gift/inheritance tax rate is 40%.