Personal Finance, Taxes 

Gift Tax

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Gift!Did you know that if you get someone a gift, you are responsible for paying income tax on that gift?

Yep, it’s known as the gift tax. Fortunately, there’s an annual exclusion involved. So you won’t be tagged for that gift card you bought your co-worker to commemorate his screaming arrival into this world.

But for the affluent, and those who are worried about the estate tax, the gift tax is very relevant. See, when you give someone a gift that exceeds the annual limit ($13,000 this year), you are required to pay income tax on those gifts on your tax return. You could also arrange it so that the recipient pays the taxes, but that requires special tax assistance.

Annual Gift Tax Limits

The limits for an annual gift are:

  • 2002-2005: $11,000
  • 2006-2008: $12,000
  • 2009-2013+: $13,000

The limit applies to each donor-donee pair. So if you are married and have two kids, you can give each $13,000. Your spouse can also give each child $13,000. This effectively transfers $26,000 of wealth from the parents to each child, which is important for estate planning purposes as the gift isn’t taxed. If you want, you can certainly send some money my way as a gift and you will not taxed on that either!

There are exclusions to the gift tax and they include tuition or medical expenses you pay for someone else, gifts to your spouse, and gifts to a political organization for its own use.

If you give property, the annual gift limits still apply but you will be required to supply appraisals and documents supporting the transfer of assets. It gets a little hairy but Form 709 United States Gift Tax Return is the form you’ll need and Publication 950 Introduction to Estate and Gift Taxes should be your guide on the matter.

Finally, your state may have it’s own gift tax rules so check with a local CPA for your state’s rules.

Now… who has some extra cash they don’t need? 🙂

(Photo: jillclardy)

{ 17 comments, please add your thoughts now! }

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17 Responses to “Gift Tax”

  1. Michele says:

    If I’m not mistaken, not only can each parent give each of their own children up to $13k per year, tax free, but they can ALSO each give each of their children’s SPOUSES up to $13k, which means that technically, a team of parents could gift their child and their child’s spouse up to $72k per year total.

    Also, while you’re required to file the tax paperwork for any gift over $13k for the year, few people actually end up PAYING a gift tax unless the size of the gift is exceptionally large (I don’t know what defines “exceptionally large”).

    For most, it’s more of a ‘cover your ass’ kind of deal.

  2. Evan says:

    Even above the $13K you start eating into your Lifetime Gift Exemption Amount (Currently, 1Mil/donor). So you can give A LOT of gifts before owing any money to the IRS.

    • cubiclegeoff says:

      With a bunch of smaller gifts (less than $10k), it’s hard to see how the IRS could keep track of the $1million/donor amount.

  3. Piggy bank says:

    In any case Gift tax is outrageous. If the money spoken of has already been taxed via suitable tax methods (income tax, capital gains tax ect) it should not be taxed again. However it is nice that there are some loop holes to work around the issue legally.

  4. zapeta says:

    Its nice to know that there is an lifetime exemption amount as well. Unfortunately I won’t be getting or giving any gifts that are anywhere close to the yearly limit.

  5. CreditShout says:

    I’ve heard about this before, but I haven’t ever come across a situation like this. My friend received a car for a graduation present and her parents had her pay a dollar for it to avoid this tax I suppose.

  6. Brandon says:

    It is important to remember that the GIFT TAX is distinct from the INCOME TAX. Care should be taken to note the differences between the GIFT TAX and the INCOME TAX, they are two separate beasts. The GIFT TAX is not an income tax and the reverse is true as well. The only commonality between the taxes is that both taxes are a tax on the transfer of wealth from one individual to another, one as compensation and the other being a gratuitous transfer.

  7. SmellDog says:

    A couple of points:

    Any portion of the $1 million lifetime exemption that you use is also deducted from your estate tax exemption. There is no estate tax in 2010, but it is due to return in 2011. Keep that in mind as part of your estate planning.

    To CreditShout: What your friend’s parents did is utterly ineffectual and they should seek competent advice. If your friend paid her parents $1 for a $30,000 car, then the parent made her a gift of $29,999. Especially given that the parties are related, there is no way the IRS or any court would accept that $1 represented the fair market value of the car.

    • You’re definitely right about the car. It wouldn’t be considered and arms-length transaction. Otherwise, Bill Gates will sell his MS stock to his daughter for $1.

      Congress still has plenty of time to restore the inheritance tax for 2010, retroactive to Jan 1. I’ll be stunned if they don’t.

    • cubiclegeoff says:

      The $1 payment for a car usually has more to do with state tax issues I think than federal gift tax.

  8. John says:

    If a parent sells there house and splits the gains with their grandkids what are obsticals to be aware of

  9. eric says:

    Haha if you end up getting too many gifts, I’ll be more than happy to help 😛

  10. Becky says:

    Does anyone know if recipients of a gift of a payable on death trust account are responsible for paying taxes. It is my understanding that the trust took care of the taxes but I can’t find any documentation on it.

  11. gayle says:

    I understand that parents can give gifts upto
    13K but what I would like to know if I take
    a gift of 10K and cash the gift in the same
    year I received it do I pay a capital gains on
    that money at the end of year when I file my
    income tax.

  12. Cindy says:

    I wish that I had one of these many listed problems. I would gladly take a gift of $13,000 from my parents. I would even gladly pay taxes on it. I, in fact, would love to help anyone who is trying to gift money for tax purposes. Any takers? haha, but seriously

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