If you’re a taxpayer who gives money or property to others, you may wonder if the federal gift tax applies to you. Fortunately, while any gift is potentially taxable, gifts are only subject to gift tax in a few specific situations.
Here are seven things taxpayers need to know about the US federal gift tax:
- Annual Exclusion. For 2016, the annual exclusion amount is $14,000. Most gifts are not subject to the gift tax – for example, there is generally no tax on gifts to your spouse or to a charity. If a taxpayer makes a gift to another person, the gift tax usually does not apply until the value of the gift exceeds the annual exclusion amount for that calendar year.
- Nontaxable Gifts. Any gift is potentially taxable, but there are exceptions to this rule. The following are examples of nontaxable gifts:
- Gifts that do not exceed the annual exclusion amount (see above) for the year in which they were given
- A taxpayer’s gifts to their spouse,
- Gifts to a political organization for that organization’s use
- Gifts to charities
- Tuition or medical expenses which the taxpayer pays directly to a medical or educational institution for another person. For example if you pay for your child’s college tuition or a relative’s medical bills.
- No Tax for the Recipient. Generally, the person who receives the gift will not have to pay tax on it.
- Gifts Are Not Deductible. A taxpayer cannot deduct the value of gifts they make, unless they are deductible charitable contributions as subject to the tax code.
- Forgiven Debt and Interest-Free / Low Interest Loans. Taxpayers who forgive debt, make a loan interest-free or make a loan below the applicable market interest rate may be subject to the gift tax. Check with your accountant.
- Gift-Splitting. A taxpayer and their spouse can give up to $28,000 (i.e. twice the annual exclusion amount) to a third party before that gift becomes taxable. Taxpayers need to consider one-half of the gift as from them and one-half as given by their spouse.If you and your spouse split a gift, you will need to file Form 709 with your tax return, even if the portion each person is giving is less than the annual exclusion amount.
- Gift Tax Filing Requirements. You will need to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, if any of the following apply:
- The taxpayer gave gifts to at least one person (other than their spouse) that amount to more than the annual exclusion for the year.
- The taxpayer and their spouse are splitting a gift. This is true even if half of the split gift is less than the annual exclusion.
- If the taxpayer gave a person (other than their spouse) a gift of a future interest that the recipient can’t actually possess and enjoy, or from which that person will receive income at a later date.
- A taxpayer giving their spouse an interest in property that will terminate due to a future event.
For more information, see IRS Publication 559, Survivors, Executors and Administrators.
Always keep a copy of your tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Learn more about verifying your identity and electronically signing tax returns at Validating Your Electronically Filed Tax Return
Need help filing your gift tax form? The professional accountants and consultants at Protax Consulting can help you with all your individual or business tax needs. Contact Protax Consulting.