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How the Gift Tax Works

Tax Planning

Have you heard of a “Gift Tax”?  Many people have heard the term, but few know what it means, what the tax implications are, and what exclusion limits exist.

Gift tax is a tax paid, typically by the donor, on non-excluded gifts after a lifetime limit is reached. In some cases, the donee (recipient) may agree to pay the tax instead of the donor.  A separate tax return is required for the donor for the tax year in which the gift was given.  For example, if you give a gift that is not excluded in 2019, you will need to file a Gift Tax Return (Form 709) along with your personal tax return before the tax deadline in 2020.  Along with the return, copies of appraisals and other documents related to the transfer should be included. 

The donor does not pay taxes on the gift amount over the exclusion each year.  Instead, tax may come due when the donor reaches the lifetime exclusion gift tax limit.  For 2018 and 2019, that amount is $11.2 million.

A gift, according the IRS, is the transfer of money or property to a party in which the donor (person giving the gift) does not receive anything of equal value in return.  The gift can be all or part of the value in the transfer.  For example, money may be given and the gift value would be equal to the amount of money.  Similarly, if something was purchased by one individual as a gift for another, the purchase price would be the gift value.  Gifts can also be given by greatly reducing the sale price of an item below fair market value (such as a house or a car).  The gift is the difference between fair market value and the price paid.

There are a few exclusions to the gift rule.  First, there is an annual exclusion amount.  For tax years 2018 and 2019 an individual may gift up to $15,000 per recipient before a Gift Tax Return is required.  Other excluded gifts include tuition or medical expenses paid for someone, gifts to your spouse, or gifts to a political organization.  These gifts are not tax deductible.  The only deductible gifts are those made to qualifying charitable organizations.

Here are some common scenarios related to gift tax returns: 

Parents decide to gift a child the funds for a down payment on a home.  In this situation, if the amount given is greater than $15,000, a gift tax return should be filed along with the parents’ annual tax return the following year.  If the money is given as a loan, no Gift Tax return is required.  However, if interest is being collected on the loan, the parents should claim the interest income on their personal tax return in each year it is received.  Please note that according to the IRS, a loan that does not require interest payments is considered a gift.

A home is sold to a friend or family member at a deep discount.  An off-market deal that takes into account no need for realtor fees being paid (for example, you do not list your home with an agent and instead sell it for slightly less than fair market value to account for not paying realtor fees) is not a gift.  However, if you sell a home with a value of $250,000 for $150,000, you have given a gift of $100,000.  In this situation you would need to provide an appraisal of the property at the time of the sale and any additional documentation related to the sale (such as the Settlement Statement) along with the Gift Tax return.      

If you buy a car for someone and put it in their name.  Often parents or guardians buy cars for their kids when they reach driving age.  However, the vehicle is often left in mom or dad’s name and is therefore still the property of the purchaser.  If that car were to be put in the name of the child, then the purchase price of the car would be considered the gift amount.  If the parents were to buy a car and many years later (such as when the child graduated from college) decide to put the title in the child’s name, the gift amount would be the value of the car at the time of transfer.  The original purchase price would not matter.    

If you are giving a gift to your child and his/her spouse.  Sometimes parents give a sizable gift to their child and his/her spouse.  In this instance, each party to the gift is treated separately for tax purposes and a Gift Tax Return is only required if a gift amount of $15,000 is exceeded per person.  For example, a woman wants to gift her son and his spouse the money for a down payment on a new home.  They need $25,000 which is $10,000 over the exclusion limit.  However, for gift tax purposes, the son and his spouse are treated as two separate gift recipients even if they file a joint tax return.  In other words, the woman can give them each $15,000 (for a total of $30,000) before a gift tax return would be required.  If the woman also has a spouse they could give a total of $60,000 before a gift tax return was needed ($15,000 from woman to son and $15,000 to his spouse; $15,000 from spouse to son and $15,000 to his spouse).

Questions about Gift Tax rules and return requirements?  We’re happy to help! Call or email our office for more information.