Remember, Some Gifts Are Taxed

“It’s better to give than to receive.” Remember that adage as a child that Mom used to badger you with to get you to share? Now it’s become ingrained and if you are in the position to do so, you may wish to share gifts with friends and family. Especially with the advent of the holiday season, our giving hearts awaken and the sharing begins.

But be forewarned. Giving gifts can be a taxable event.

Most givers think they may be able to write off the gift they present to another individual, usually their child. Can I deduct it as a charitable contribution? The answer is no, you cannot. Donations to charity must be to bona fide 501(c)(3) organizations. Therefore, money given to homeless individuals or families in need, or to your son or daughter are not deductible as charitable contributions and therefore do not present any tax benefit for the giver.

Your generosity to family, friends, or other individuals goes unrewarded in this lifetime. And in fact, the converse is the case. The act of giving may be a taxable event for the giver. The recipient is home free. You can give someone a million bucks and that person does not have to pay taxes on it.

But you might have to.

Here are the rules. You are allowed to gift up to $14,000 (for 2014) per year to any person without having to declare the gift and pay gift tax. Every year the dollar amount of an allowable gift changes, so stay tuned for a new threshold in 2015 and beyond.

Let’s say you and your wife would like to gift $50,000 to your son and his wife so they can put a down payment on a house. You are allowed $14,000 per individual per giver. Therefore, you can give tax free a grand total of $56,000 in this instance without incurring a tax liability. As the giver, you may gift $14,000 to your son, $14,000 to his wife and your spouse may do the same. $14,000 x 4 = $56,000.

Let’s say however, that you wish to gift them $100,000. To prevent taxation of the excess, consider splitting the gift over a two year period rather than all at once. Or make a loan of the excess. But put it in writing, secure repayment, and be sure to charge interest. The IRS insists that you charge the Applicable Federal Rates for the transaction to be construed as a loan rather than as a gift.

The IRS provides guidance for certain acts that are excluded from the gift tax:

Gifts that are not more than the annual exclusion for the calendar year.

  1. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  2. Gifts to your spouse.
  3. Gifts to a political organization for its use.

If you find that you will provide the gift all at one time, and incur the taxable event, The gift is not declared on your Form 1040. Instead, file IRS Form 709. You may pay up to 40% of the value of the gift in taxes.

Keep in mind that gifts under $14,000 may sometimes have to be reported. A gift under the exclusion amount must be characterized as “a present interest,” meaning that the recipient can use the gift immediately. If it is not, let’s say it’s a gift to a trust, in which beneficiaries don’t have any rights until later. A gift of this nature that has no present interest value must be reported, no matter how small the amount.

For more information consult IRS Publication-559,-Survivors,-Executors,-and-Administrators. There are many rules and regulations and exceptions governing this issue, so it would be wise to consult with a tax advisor who is competent in this area of the tax law.