Being generous throughout the year may not hurt at tax time!
By: Chintamani | Posted: 23rd November 2009
If you want to gift someone, do not worry about taxes. There are effective strategies available. Right now, if you are giving a gift, your threshold is $12,000 to any one recipient. That's pretty generous. If you are married, you and your spouse can split the gift-giving threshold, increasing it to $24,000.
This threshold is for gift givers. If you give a gift to a single individual and the value of that gift exceeds $12,000, you must report the total of all gifts to the Internal Revenue Service. The person receiving the gift is not liable for gift or income tax on its value. The receiver of the gift does not even have to report the gift to the Internal Revenue Service.
Qualifying gifts for this threshold are money, real estate, personal property, low interest loans, or future shares in property.
Although you might be required to report gifts in excess of the threshold ($12,000), you can circumvent tax liability by using your unified lifetime credit. For gift tax returns the unified credit is $345,800. The donor is responsible for filing and to pay taxes arising from the gift. That is to say, unified credit applied against a gift tax this year will reduce the amount of unified credit that can be applied against a gift tax in following years.
Let's say that a taxpayer gives a nephew a gift of $8000 and then gives their son and daughter a cash gift of $25,000 each. Applying unified credit to the gift giving, the first $12,000 given to each person is not taxed. So, the first $12,000 given to the three individuals is not taxable, in each instance. That's $32,000 of non-taxable gifts.
The gift tax on $26,000 (the remaining $13,000 for both the son and daughter) is $5,120, according to the gift tax table. So, the unified credit of $345,800 is reduced by $5120 and becomes a unified credit amount of $340,680. This is the amount of unified credit that can be applied against gift taxes in following years. There is no gift tax charge for the year in which the gifts were given. However, you must still file a report of all of this to the Internal Revenue Service using form 709.
There are gifts that are generally always non-taxable, such as gifts to your spouse, gifts to a political organization, gifts to charities, medical expenses paid directly to a medical facility or doctor for the benefit of an individual, tuition paid directly to an educational institution for the benefit of an individual, and, of course, gifts below the annual threshold quantity.
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Tags: nephew, recipient, real estate, personal property, tax liability, income tax, threshold, internal revenue service, gift givers