Even though the Holiday Season is past us, the memories of celebrating the holidays with your family and friends, sharing the love and joy, and of course exchanging gifts. While the majority of gifts are non-taxable, if you gifted someone money or property, you may be required to pay Federal Gift Tax. Here is what you need to know.
You do not need to pay taxes if you make a gift to your spouse, a political organization or your favorite charity. If you give a gift to someone else, the gift tax will not apply until you reach the annual limit of $13,000 for 2013 and $14,000 for 2014. Thus, there is no need to file a Gift Tax Return, also known as Form 709 Introduction to Estate and Gift Taxes. The annual exclusion amount is doubled for joint tax returns, allowing a couple to give a child or grandchild a gift of up to $26,000 in 2013 and up to $28,000 in 2014 with no tax consequences. However, you would have to file Form 709 in this case.
If you give a gift in excess of the annual limit, the IRS requires you to file a Gift Tax Return. However, you will owe no taxes until all your gifts will reach the lifetime limit, which is $5.25 million per spouse in the 2013 tax year.
Other types of gifts that will not decrease annual gift tax exclusion or lifetime gift tax exemption are medical payments and/or educational expenses for another person, for whom you pay the bills directly to the medical provider and/or the educational institution. Also included under this is making payments to someone else’s 529 College Savings Plan. Basically, if you pay someone’s educational or medical expenses, or give money to a political organization, you do not need to fill out the gift tax return form.
Generally, the person receiving the gift will not have to pay federal income taxes on the amount of the gift, and it will not affect your annual taxable income. While the Federal Gift Tax exists to prevent citizens from avoiding taxes by giving away their money without tax consequences, you can still use it to reduce your taxable estate without eroding your lifetime gift tax exemption. If you give property as a gift, you can reduce your income property tax by passing it to the family member who may be in a lower tax bracket.
How to file Form 709: Introduction to Estate and Gift Taxes
Form 709 is an individual form. Each spouse would have to file their own if they both make a taxable gift. On the gift tax return, you need to report the fair market value of the gift on the day of the transfer, your tax basis and the name of the recipient. Attach all the support documentation to support the gift valuation, such as real estate appraisal for the property gift. If you sell property to your family member for full fair market value, you don’t need to file the Form 709, but it might be a good idea. Filing Form 709 starts the 3 years statute of limitation clock, so the IRS can’t come back later and question the value of the property once the statute of limitation has passed.
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