Do You Understand the IRS Gift Tax Rules?

September 29, 2015

They’re complicated. There are rules, and there are exceptions to the rules. You should consult with your tax professional.

It’s referred to by many as, “…the great wealth transfer.” In 2014, CNBC reported on a study by Accenture predicting that $30 trillion will pass from the hands and financial accounts of the baby boomers to their heirs over the coming decades.

MST blog 2nd September image 1If you’re dealing with the transfer of a sizable estate to the next generation, you undoubtedly are – or certainly should be – working with your legal and financial professionals. But smaller amounts of money that you give to individuals may be subject to what’s called the gift tax. You may be required to file a special IRS form and, as the donor, you’ll usually be the one to pay the tax due on the gift.

According to the IRS, a “gift” is, “…any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.” In other words, money (or a gift of equivalent value) for nothing.

The IRS has established what it calls the annual exclusion amount. If you are gifting less than this (the figure was $14,000 for the 2014 tax year), you are not required to pay taxes on your generosity – unless the gift represents what’s called a future interest. This refers to situations where the recipient will not be able to, “use, possess, or enjoy” the money or property until some future date.

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You’ll probably have to file a Form 709 if you give a gift worth more than $14,000 – but maybe not. Some gifts worth less than that amount, though, may be subject to the gift tax.

There are also situations where a gift worth more than $14,000 is not subject to this special tax. These are transfers to:

  • A political organization,
  • A “qualifying” educational institution (tuition payments for an individual attending a school), and,
  • A care provider that meets certain requirements (payments for medical care gifted to an individual receiving them).

Spouses are treated differently by the IRS, and gifts to them may or may not require the filing of special forms and payment of tax owed.

There are at least as many exceptions to the gift tax rules as there are rules themselves. For example, money or property doesn’t necessarily have to change hands for the gift tax to be invoked. Some examples of this include forgiving a debt, transferring insurance policy benefits, and making an interest-free loan.

This is why it’s so critical that you work with us whenever you’re in a situation where you’re helping someone benefit financially while getting nothing in return. We can help you stay compliant with the IRS’ gift tax rules – and, of course, any other elements of taxation.

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