Tax season has ended. Maybe you got a big refund and are feeling particularly generous. Or maybe you have a family member that didn’t get a refund and is feeling panic about how he will pay. How about a gift?
Each of us can give away $13,000 per year to any person that we want. This includes our kids, our grandkids, our parents, our favorite Aunt Fanny or neighbor Fred. Free to them, free to us – possibly no strings attached but definitely no tax attached.
Sometimes gifts are made in cash, but other times they are property. I love watching Antiques Roadshow where the person admits that she got the broach from an elderly neighbor who didn’t have any kids or the painting that no one likes from an uncle who lived with them for a while. Turns out the broach is a Tiffany with diamonds and emeralds and the painting is by a lesser known but highly collectible American artist. Gifts with high value and probably no gift tax return was done.
A gift tax return (Form 709) is required when total gifts in a year are more than the annual exclusion amount – or $13,000 per gift recipient for 2010. There are several exceptions to this rule. Gifts to charity are not gifts for this purpose. Gifts to your spouse don’t count either (unless your spouse is not a US citizen). The best exception though is for tuition or medical expenses paid directly to the educational or medical institution. As long as you make the payment straight to the school or doctor, it is not a gift to the person that you paid them for.
If you are married, you and your spouse can gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. This is called gift-splitting. Gift-splitting is very common in community property states (like my home state of Texas). If a gift is made from community property, it is considered a gift from each spouse and gift tax returns are required. If you elect gift-splitting, generally both you and your spouse must file gift tax returns (two separate returns) to show that you have agreed to the gift splitting. You cannot file a joint gift tax return with your spouse. There are exceptions where only one spouse has to file a gift tax return – but like a lot of rules in tax, they are too complicated to discuss in a blog. Definitely talk to your tax advisor.
Back to that fabulous broach from the neighbor. Cash is easy to value; property is more difficult. The value to be used for gifts is “fair market value” or the price that would change hands between a willing buyer and a willing seller. The Antiques Roadshow appraisers almost always give a range for value with qualifying statements like “if it were in the right auction with the right collectors” or “if I had it in my shop”. The best advice I can give is to have the item appraised by a qualified appraiser at the time of the gift. Let the person know that you are requesting the appraisal for purposes of gift tax. You’ll have to attach the appraisal to the gift tax return if the value is over $13,000. If it is under the annual exclusion amount, put the appraisal in a safe place in case there is ever a question.
Generally the donor is responsible for filing the gift tax return and paying any gift tax. However, if the donor does not pay the tax, the person receiving the gift may have to pay the tax. So if you get a large gift, it is in your best interest to confirm that a gift tax return was done.
Most of the time, gift tax returns do not generate any gift tax because each of us also has a lifetime exclusion amount. More about this and gifts into Qualified Tuition Programs (529 Plans) in Part 2 of this blog.