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Taxing the Gift – The Gift That Keeps on Giving

Jun 30, 2015 | Tax, Tax Planning

“A son can bear with equanimity the loss of his father, but the loss of his inheritance may drive him to despair.” – Niccolo Machiavelli

Gift tax?The Tea Act – the act that spurred the Boston Tea Party – left in place the hated three-pence-per-pound duty enacted by the Townshend Acts in 1767.

A three-pence-per-pound duty.

Fast-forward two hundred and forty some odd years and the government taxes most things.

We tax alcohol.
We tax tobacco.
We tax income.
We tax capital gains.
We tax the value of estates.

And yes…. we tax gifts.

Gifts? The Federal government taxes gifts?

Yes. For the most part.

The general rule is that any gift is a taxable gift. Certain gifts are never taxable such as:

  • Tuition or medical expenses you paid directly to a medical or educational institution for someone,
  • Gifts to your spouse (for federal tax purposes, the term “spouse” includes individuals of the same sex who are lawfully married),
  • Gifts to a political organization for its use; and
  • Gifts to charities.

Other gifts are taxable, but the Internal Revenue Service does not care enough the make you report the gifts and tax those gifts.

Would you really want to pay gift tax on that Lego set you gave your nephew?

If you give a gift to someone else – not to your spouse or a charity – the gift tax usually does not apply until the value of the gift exceeds the annual exclusion for the year. For 2014 and 2015, the annual exclusion is $14,000. Generally, the person who receives your gift will not have to pay a federal gift tax. That person also does not pay income tax on the value of the gift received either. As the Internal Revenue Service prefers balance. Since the gift is not income, making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make other than deductible charitable contributions.

You and your spouse can give a gift up to $28,000 to a third party without making it a taxable gift. You can consider that one-half of the gift be given by you and one-half by your spouse.

Note: Forgiveness of Debt and Certain Loans. The gift tax may also apply when you forgive a debt or make a loan that is interest-free or below the market interest rate.

Filing Requirements. If you give gift or gifts that exceed the annual exclusion – $14,000 or $28,000 if you gift split – you must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. If you and your spouse are splitting a gift, you must file the return. This is true even if half of the split gift is less than the annual exclusion. If you gave someone other than your spouse a gift of a future interest – an interest in something that they can’t actually, immediately possess, enjoy, or from which they’ll receive income later – you will have to file a return. And finally, and most odd, if you gave your spouse an interest in property that will terminate due to a future event, you have to file a return.

If you have questions – please give us a call or contact us.

For more information, click on the links below:

Seven Tips to Help You Determine if Your Gift is Taxable, IRS Tax Tip 2015-51.

Publication 559, Survivors, Executors, and Administrators.

Instructions to Form 709 – United States Gift (and Generation-Skipping Transfer) Tax Return

Form 709 – United States Gift (and Generation-Skipping Transfer) Tax Return


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