Gift Tax Can Help or Hurt You
Of all the ways to try to minimize tax consequences, and of all the more complex provisions of the IRS tax code, the gift tax may be the one that is most likely to trip someone up who thinks that they can outsmart the tax code.
It is very tempting for someone with income or assets who is seeking to avoid a tax liability on them to simply say “I have a great idea—I’ll just give this money away to friends or family!” Or, seeking to be more “strategic,” they may sell an asset for a fraction of its value. Thus, magically, they figure they have now reduced their tax liability.
The Gift Tax
But along comes the gift tax. The gift tax places a tax on the giver of certain gifts, which can include actual property, or money. The IRS considers something a gift when it’s given without receiving anything in return, or when receiving less than full value back for what is given. Importantly, the IRS doesn’t consider your intent—what matters is what is actually received in return for what was given, if anything.
Most often, gift tax liabilities happen by accident. Somebody may make a loan to a friend for a ridiculously low interest rate, or a family member will give an old car to an adult child. The intent to gift is there, but the giver may have no idea they may be subjecting themselves to gift tax liability.
Exemptions and a Cap Apply
The gift tax will be assessed to the giver, but the person receiving the gift can opt to pay the tax. Luckily, the threshold for the tax is $14,000, so if you’re just casually giving Christmas presents, or a single older vehicle, there’s a good chance that you don’t have to worry about being taxed. Still, over the course of the year, that number can be approached very quickly if you’re not careful.
There are other exceptions. Gifts given between a husband and wife don’t count, so you can gift away as you like. Paying for tuition (student loans) or medical expenses for someone else doesn’t count as a gift. Contributions to political or religious organizations also don’t count towards the gift tax cap.
Even better, a husband and a wife can pool their gift tax cap. So, for example, a husband and wife could give way up to $28,000 ($14,000 each), and still avoid the gift tax.
Given these exemptions, for many people gifting property may be a viable and effective way to avoid some tax liability. But like anything else, it’s important to remember the complex IRS rules that apply to gifts. Talk to a professional to do things the right way, before you simply give everything you own to someone else, in an effort to fool the IRS.
Don’t make tax mistakes trying to plan on your own. Contact Tampa business, asset and probate attorney David Toback to discuss a comprehensive personal and business tax and estate plan.