For most folks, the only time you’ve had to deal with gift tax was when you drew that dreaded card while playing Monopoly and had to throw a piece of pink currency into the center of the board. But if you know a little about the tax law surrounding gift tax, you’ll find that a little planning can keep you from paying lots of green into the center of the gaping mouth of the IRS.
Over the years, I’ve fielded a number of questions relating to the taxability of gifts. They usually go like this: “My grandmother gave me twenty grand for Christmas. How much tax do I have to pay on that?”
The answer always surprises them. The answer is none. Zero. Nada. Grandma can give you twenty million bucks and you wouldn’t owe a dime in taxes. How can that be? Well, the first rule on gift taxes is that the recipient isn’t taxed. It’s the giver who winds up with the tax bill.
Of course, I always get a different question from the giver, namely, “I gave my grandson twenty grand for Christmas. Can I write that off?” They just hate it when I tell them that not only is it NOT a write-off, but they could be liable for gift tax.
First of all, what is a gift? According to the IRS, “It’s a transfer of property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return.” If you sell something for less than its fair market value or if you make an interest-free loan or even a reduced-interest loan, you could be making a gift.
Just about anything you give away could be subject to gift tax. But there are exceptions:
- Bestow all you want on your spouse. Get lavish. No gift taxes for transfers to a husband or wife. But you will have to file a gift tax return if you give your spouse an interest in property that will be ended by some future event.
- Pay tuition or medical expenses for anyone – as long as you pay it directly to the medical or educational institution. No tax will be due.
- Be generous with bona fide charities – these gifts are deductible and not subject to gift tax.
- Gifts to political organizations are not subject to gift tax, nor are they tax deductible.
- Gifts, excluding gifts of future interests, that are less than the annual exclusion for the calendar year are not taxable transactions.
The annual exclusion for all tax years beginning January 1, 2014 is $14,000. This exclusion amount did not change for 2015. It’s still $14,000. You can give that much without incurring a tax liability or having to file a gift tax return. Anything above that amount may be subject to gift tax. Married couples can gift a total of $28,000 (twice the annual exclusion) to a single recipient without incurring a gift tax liability.
If you wish to give more than the annual exclusion, you may be able to defer taxes on the gift by applying the unified credit (from your future estate tax) to the gift. This reduces your unified credit in future years but is a good tool to legally avoid paying gift tax now. You are still required to file Form 709 to declare your gifts.
Business Gifts:
Some gifts, other than charitable contributions, are deductible. You may give business gifts up to $25 per year per recipient to clients, associates, and employees and deduct them on your income tax return. Wrapping paper, gift cards, engraving, insurance and mailing are considered incidental expenses and not included in the $25 cap.
The $25 limitation has been around since Day One and I find it aggravating. You’d think the IRS would have adjusted that amount for inflation.
And you can’t double this gift deduction by including your spouse or business partner as a giver to the same recipient. Under this definition, you and your spouse or you and your business partners are considered one giver.
If you wish to spend more than $25 – you know, like if you don’t want to appear cheap – and get the write-off – you may consider giving something that would fall under the category of meals and entertainment. These expenses are subject to a 50% hair cut but what the heck. It could be more advantageous and enjoyable to take your client to a $100 dinner and get a $50 write off than spend $50 on a gift but enjoy only a $25 deduction.
If you are planning to make gifts above the annual exclusion, especially this year with no estate tax to worry about, check with your tax pro to decide how to gift in the most economical and least taxable method possible.
