Be Cognizant of the Federal Gift Tax Law and Details

September 7, 2010 | By: TaxCure Staff

federal gift taxThe gift tax is often considered the most complicated area of the IRS tax code. If you are planning to give a large gift, you may have to pay the gift tax. The IRS has set up a gift tax to prevent taxpayers from avoiding taxes by giving away all their money. It is highly recommended that you seek out the help of a professional to help you determine what forms you will need to fill and how to fill them out in claiming your gift if you are giving above the exclusion amount or not meeting certain exceptions. Either and a Tax Attorney or CPA can generally help. Below you can find some general information about what the gift tax is, who is responsible for paying it, what the exclusion amount is, what forms are needed when giving a gift above the exclusion amount, and other details that may apply to you now or that you may need to know about for the future.

Almost always the person giving the gift will pay the gift tax. In most cases, if the receiver becomes responsible, it is so because the donee voluntarily agrees to pay the tax. But what is a gift? A gift according to the IRS “applies to any transfer by gift of real or personal property, whether tangible or intangible, that you made directly or indirectly, in trust, or by any other means to a donee.” Fair market value, according to the IRS website is, “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent’s gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.” Regulation §20.2031-1.

Gifts that are excluded from the gift tax (or do not deduct from the 1 Million dollar lifetime exclusion amount or $345,800 unified tax credit) include those that are valued under the annual exclusion limit for the particular tax year. Moreover, gifts entailing educational tuition, medical expenses, gifts to political organizations, your spouse, or charities are also normally excluded. Just like 2009, the annual exclusion for married couples is $26k or $13k for individuals for 2010. The exclusion applies to each gift, but some gifts called “future interests” or gifts to be enjoyed in the future do not apply to the $13,000 exclusion amount, and you must file Form 709 even if the gift amount was under $13,000 (See Form 709 Instructions). In general, if you have three kids, you can give them each $13k per year ($26k for married individuals with separate checks) and not be responsible for filing a gift tax return (documenting a 50% split). However, if you give them more than the annual exclusion amount ($13,000) per person, the amount over will start to use up a portion of your $345,800 unified tax credit (1 million dollar lifetime limit) which will require you to keep a tally by filing Form 709. Once your 1 million dollar lifetime limit is used up, you will begin paying the Gift Tax. Below are some general guidelines to follow in determining whether if you need to file Form 709 for this year:

  • You gave no gifts to your spouse in 2010*
  • You did not give more than $13,000 to one person ($26,000 if married)
  • All gifts you made were of present interests

*If your spouse is a US citizen, you can give as much as you like to your spouse if the gift meets certain exceptions (see IRS Publication 709 Instructions). If your spouse is not a US citizen, you can only give up to $134,000 in 2010, to avoid tax implications.

If you are filing Form 709, make sure to include appraisals, and other documentation if applicable. There are other caveats when the Estate Tax comes into play. In any event, it is recommended that you work with your tax professional if have any questions about anything.