“I don’t know what’s in the box, but I love it. Unopened gifts contain hope. ” ~Jarod Kintz, This Book Title is Invisible
We all love to give gifts, big or small. We love to watch that growing expression of delight as someone rips off the wrapping. The atmosphere is electric, and everyone is happy. Gifts are wonderful to give. But, are all gifts good to give?
Many gifts are tax deductible, but many more are not, and that is where tax payers get into trouble with the IRS. A gift, as defined by the IRS, is a transfer of something from one individual to another, when compensation is not received in return for the gift.
A Money Gift
A gift of money is clearly defined by the IRS. As of January 1, 2013, an individual can give someone a gift of up to $14,000. If you give more than that, taxes are owed on the difference. Spouses can combine their individual ability to give gifts so a gift could be up to $28,000 annually. The IRS will pursue taxpayers who exceed the annual exclusion amount, and did not file the appropriate paperwork.
A Property Gift
If you give property, you are bound by somewhat different rules. Your “basis” in the property is what you paid for it, say $10. You give the property to your daughter, and she decides to sell the property for $100. She is bound by the same basis as you are, so she must pay taxes on the difference between the basis and sale price or $90.
We all try to give to one or more charities each year, but there are strict rules to follow here also. You need to investigate the charity and make sure that it is approved by the IRS as a charity. All or part of your donation might be tax deductible, but the rules vary significantly so you need to investigate this type of gift if you wish to do it.
Gifting a Child
You must gift properly into a child’s account. When you give gifts to a child’s account, that account should be an UGMA/UTMA account. This is an investment account in a child’s name, and it can be a savings account, Savings Bonds, securities (stocks, mutual funds, Treasury bills). There is an adult custodian, and another ticklish situation arises here. If you give the gift and you are the custodian, that account will be considered as part of your estate. This could present difficulties if you happen to be a grandparent and die before the child accesses the account. This account also has to generate a tax return for the child, but the rates are generally lower.
The IRS frowns upon gifts given to friends (such as significant others) rather than a spouse. You can give your spouse anything and it is not subject to tax. BUT, if you give your girlfriend a gift, it becomes a taxable event. With the recent court rulings on the definition of marriage, this issue may disappear.
Paying Medical Expenses or Tuition
If you want to help out a family member by paying for their medical care or assist someone with their tuition costs, you are required to write the check not to the individual, but rather write that check to the institution involved. This is another area that the IRS watches carefully.
This year, thank goodness, is not an election year, so we are spared the million or so ads we are subjected to prior to the election. People do feel strongly about politics, regardless, so often donate to the political organization of their choice. If the organization has been designated by the IRS as a 501(C)3, your cash donations are tax free. There are organizations out there which are not registered with the IRS, so if you donate to those, you can run into issues if you exceed the gift limits. This is also one of the reasons why so many conservative organizations were upset when their applications to become 501(C)3 entities were delayed or disapproved. It basically meant that all possible donors were going to go elsewhere and not donate to them. This could be disastrous for a young association.
To sum up, when you consider making a gift, follow the IRS rules for the amount of the gift as well as filing the appropriate paperwork. Every one of these instances can provoke the IRS into aggressive action against you, so if you get into some problems when you give a gift, call Jeff Fouts, Tax Lawyer, and he can work with you to solve the issue. Better yet, call him when you are thinking about giving a gift and get his advice—that way, you will avoid problems from the start.