Taxes on Gifts

Transferring of certain property to some relative, friend or even an employee is connoted to be a gift. There are several cases where people undertake such transfers in order to plan their finances or secure the well-being of some of their relatives. The transfers are subject to certain taxes, which are governed and implemented by Chapter 12, Subtitle B of the Internal Revenue Code. There are some simple rules with the help of which the tax implications of the gifts can be ascertained.

Tax on Gifts

Federal taxation on gifts is a direct tax and the tax liability or tax debt are payable by the transferee, plus gift based upon the nature of transfer can, or cannot, become an income for the transferee. A 'Gift' is basically, any property or money or money's, tangible or intangible asset that is transferred by an individual to another individual without the exchange of any consideration. This principally does not make it a transaction, it is just a transfer of right of ownership from the donor to the transferee. So, the obvious question is what is the logic of paying gift tax. The obvious answer is that the government does not want you to gift away your money or assets of any kind to reduce your overall tax liability. While filing a common income tax, certain gifts, donation and transfers of property are deductible from the total income. The gift tax imposed by the IRS prohibits, or rather discourages, tax payers from exploiting these deductions. The second root of the tax is that it also prevents the evasion of estate tax. Thirdly, it prevents people from conducting illegal and unethical activities.

Mechanism and Working of Gift Tax

As mentioned above, on receiving a gift no tax has to be paid, however the person who has gifted amount has to worry about the tax implications. Thus, as an individual you also do not have to worry about any issues such as taxes on wedding gifts. There are however certain terms and conditions for even these amounts. In the year 2010 gift taxes were revised, and are to be phased out after 2012. The arrangement is connoted to be a temporary one. The basic mechanism of gift tax is a bit different. Here is how it works:

• The lifetime exclusion or tax deduction from the gift tax is $1,000,000.
• The annual exception limit is $13,000, if gifted individually, and $26,000 if jointly gifted along with spouse.
• Anything that exceeds the $13,000 sum or $26,000, is to be reported in the gift tax return ,which is known as Form 709: U. S. Gift (and Generation-Skipping Transfer) Tax Return, filing limit April 15. In such instances the amount that exceeds the annually prescribed limit does not become taxable.
• Throughout your life you may give several gifts in the form of cash or worth of cash, with or without exceeding any of the limits. Whatever exceeds $13,000 or $26,000 keeps totaling up year after year and the moment this accumulated amount exceeds the lifetime limit of $1,000,000, you are legally obliged to file the Form 709 and also pay 35% of the gift as taxes on monetary gifts that exclude $1,000,000.

As of 2011, the basic lifetime exclusion has been raised to $5 million. One twist to this tax is that your executor also becomes liable to pay it along with the common estate taxes. It also means that initial $5 million of your estate after your demise would not be taxed as estate and inheritance tax, which makes things a little easier.

Just like in case of income tax there are certain deductions, i.e. there are certain gifts that are not taxed, this includes, all the initial deductible gifts (the ones under $13,000 / $26,000), charitable gifts, gifts to spouse under $134,000 per annum, and lastly, the gifts for educational expenses. Taxes on gifts to children, minor, in an outright manner, or through Uniform Gifts to Minors Act, which are under $13,000, are totally exempt.

In the aforementioned information please take into consideration, the $13,000 limit is applicable per gift, and there can be multiple such gifts. The rules that have been stated are as per the current date the Internal Revenue Service (IRS) guidelines and are subject to change. Also note that the taxation on gifts from parents, or from employer, have same implications, and the relation between the donor and transferee does not affect the limits, implications or even the rules. For further doubts and queries please have a look at the IRS website or the guidelines that accompany your tax forms. Best of all, in case of large tax liabilities or probable tax liabilities, get the advise of a tax attorney.