Everyone is thrilled whenever a gift box lands at the doorsteps from a loved one. Gifts are signs of love and show appreciation of the receiver by the giver. One major concern taxpayers face however, when procuring gifts is how the purchase would affect their taxes. Currently, gifting rules are connected with the Estate Tax that is set to expire at the end of the year, unless is renewed by Congress after the elections.
The combined exclusion of the gift and estate tax for 2012 was $5,120,000. It is from this amount that the value of every eligible gift you purchase is subtracted. You can only have a tax due the moment you surpass the exclusion amount. If, for example, a taxpayer with two children spends two million dollars on the kid’s gifts, he or she still remains with $3.1 million that in case of death will be subtracted from the estate value before subjecting it to taxes. If the value of the estate is say $5 million, subtracting $3.1 million leaves $1.9 million that the IRS will then subject the estate tax to.
A gift, according to the IRS is defined as a possession that can either be tangible or intangible; cash, land, buildings, collectibles, etc. For the gift to be eligible for tax deduction, it must be given in full and any claims to the gift by the giver must be given up for the recipient to have full possession of the gift.
Some transfers, like exchanges between spouses, according to the IRS, are not considered as gifts. Also, gifts aimed at paying for tuition and medical costs paid directly to the medical organization or school are not deductible. However, they can be eligible for deductions if they are given to an individual who pays the expenses or reimburses.
For 2012, the gift tax is subjected to the value of each gift exceeding $13,000 and it is mandatory that a return is filled. Gift tax is filed on Gift Tax Return (Form 709). The recipient on the other hand, doesn’t have to report the gift nor pay the gift tax as it is the sole responsibility of the giver who needs to record any previous exclusion amounts.
Many taxpayers can avoid, or may never have to pay the gift tax and therefore, won’t be required to file any Gift Tax Returns with the IRS. The rules are however, a bit complex and a discussion with a tax pro is highly recommended.