First, what’s a gift? A gift in tax code parlance is a transfer of property or money to another individual without receiving “full” consideration in return. You can gift directly or in “trust”. So what constitutes a taxable gift?
Gift tax is owed when you gift “too much” to other persons since gift tax is closely related to the estate tax. The government has an interest in monitoring the amount of property you have transferred during both life and death to make sure you don’t exceed the lifetime and estate tax exemption amount, currently $5,490,000 for 2017.
So in reality, while gifts may need to be reported to the IRS, most are nontaxable gifts.
Nontaxable gifts. The general rule is that any gift is potentially taxable. However, there are exceptions to this rule. The following are nontaxable gifts:
- Gifts that do not exceed the annual exclusion amount for the calendar year (see below),
- Tuition or medical expenses you pay directly to a medical or educational institution for another person,
- Your gifts to your spouse,
- Gifts to a political organization for its use, and
- Gifts to charities.
Annual exclusion. For 2017, the annual exclusion amount is $14,000. Most gifts fall within the annual exclusion and are not subject to the gift tax.
No tax on recipient. Generally, the person who receives the gift will not have to pay tax on it. Lucky them!
Gifts not deductible. Making a gift does not ordinarily affect your income taxes. You cannot deduct the value of your gifts other than the important exception of deductible gifts to qualified charities (donations).
Forgiven debt and certain loans. If you forgive a debt or make a loan interest-free or below the applicable market interest rate, you have likely made a gift and it may be subject to the gift tax.
Filing requirement for gifts. You need to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, if any of the following apply:
- You gave gifts to at least one person (other than your spouse) in one year that totals more than the annual exclusion for that year.
- You and your spouse are splitting a gift. This is true even if half of the split gift is less than the annual exclusion.
- If you gave a person (other than your spouse) a gift of a future interest that the recipient can’t actually possess, enjoy, or from which that person will receive income later.
- You gifted your spouse an interest in property that will terminate due to a future event.
Be sure keep a copy of all Form 709s filed. Since the gift tax and the estate tax are tied together, Form 709s (Gift tax returns) will be needed on your death.
Melinda Nelson, CPA