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Understanding the Gift Tax

October 10, 2012 By

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.

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Same-Sex Parents Enjoying Tax Breaks as Laws Clash

August 22, 2012 By

There is confusion regarding laws that touch on gay and lesbian parents. Fortunately for the gay and lesbian couples with kids, these conflicts can turn out to be avenues for the much desired income tax breaks. Many same-sex couples adopt children but still have to work through an array of legal and financial disorders that are mainly brought about by the Defense of Marriage Act. This is a 1996 law that forbids the federal government from recognizing same-sex marriages as per accountants and tax attorneys.  

Despite the increasing legalization of same-sex marriages in various states in the U.S. like Iowa, Connecticut, New York, Washington D.C, Vermont, among others, the Internal Revenue Service has to treat such spouses without any special regard to their marital status. The federal law forbids legally married same-sex partners from enjoying similar Social Security benefits that can be enjoyed by their heterosexual counterparts. These spouses also have to pay taxes on their health insurance benefits and gifts, which are never paid by heterosexual couples.

The two sided sword that the law can however, present the same-sex parents families with a number of tax breaks. The most significant break comes from the law that prohibits same-sex couples from jointly filing their federal tax returns. This means that they are exempted from the marriage penalty, which can sometimes lead to a higher tax rate because of the joint income that pushes their income into a higher tax bracket. Even if they opt to file separately, they will still have to part with more compared to single taxpayers.

A gay or lesbian parent who provides over 50% of a child’s financial support can claim a head-of-household filing status. Such an individual ends up with a higher regular deduction and a lower tax rate compared to single taxpayers. Couples with two or more kids can each claim head-of-household status and various child tax credits. However, the IRS is not so pleased with this kind of arrangement and same-sex parents with kids are advised to talk to their tax professionals.

Same-sex couples who decide to adopt kids can claim up to $12,650 in adoption expenses per qualifying child. However, the taxpayer’s adjusted gross income must be below $189,710 to qualify for this break. Furthermore, same-sex parents can take advantage of the education credits, like the American opportunity tax credit that provides a tax break of up to $2,500 per child annually.

Gay and lesbian couples from California, Nevada and Washington must however, take extra caution when working out their taxes. The IRS declared in 2010, that any legally married same-sex couples in these states evenly split their income 50-50. This means that none of the parents can claim to be head-of-household. Such parents are however, encouraged to talk to their tax professionals for the best way to deal with their tax issues and take advantage of the available tax breaks.

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Tax Perks Available to Parents

June 15, 2012 By

Becoming a parent comes with certain perks. Parents are eligible for a host of tax deductibles and credits:

  • One of these is the Child Tax Credit, which offers up to $1,000 per qualifying child. A qualifying child is one who is under the age of 17 at the end of the tax year, claimed as your dependent, and living with you for more than half of the year.
  • Another credit is The Child and Dependent Care Credit, which if you and your child qualify, can be very valuable. It’s designed to offset against baby sitting and daycare costs incurred so that you can work (or look for work) and amounts to up to 35% of your qualifying expenses. The child must be below thirteen years of age, and should not be under a spouse’s care. Income restrictions apply, too, along with other rules. Note, too, that this credit is available if you pay someone to care for a non-child dependent, too, such as an elderly parent.
  • The Earned Income Tax Credit can be of great help to low-income working folk. Sadly, it is rarely claimed, owing to its rampant complexity and restrictions. It’s claimed by only a fifth of working folk, at an average of $2,200. You don’t even need to have children to qualify, though the amount creditable increases with the number of children.

The tax credits mentioned above are not exclusive to the married parents. It is important to realize this fact, as most single parents tend to miss out on credits they qualify for, as they’re under the impression that only the married qualify.
Single Parents

Single parents are a significant cohort in our population. In 2011, 27 % of all American children lived with only one parent.

If you happen to be single and a parent, you should consider switching to “Head of household” for tax purposes, as it shall cut your tax bill. The Heads of households in 2011 are eligible for exemptions of $3,700 for themselves and each qualifying child against their taxable income. Say you have three children? That’s a total reduction of your tax burden by $14,800.

Short End of the Stick
With respect to tax code, single parents get the short end of the stick. For example, in home sale exclusion, the person is offered the chance to exclude up to $250,000 of the qualifying gain from the sale of a home from taxable income. This potentially large tax break is doubled to $500,000 exclusion for married couples, exclusively. A single parent may be a head of a household of three, four or five people, but still enjoys the benchmark exclusion for a single person, which hardly seems fair.

The limits for married couples filing jointly are far higher than for singles and heads of households, despite the possibility that single parents may be supporting much larger families, and may be incurring much higher expenses, sans the benefit of a double income. However, in some cases, such as when the single filer earns lower income than a married couple may end up with a higher dependent credit.

The tax system may seem unfair, but your hands are tied. As such, you ought to make sure you take advantage of all the tax breaks available to you as it may save you lots of money.

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