Q:

Subject:  Question about gifting

My dad passed away this year and my mom is now interested in gifting to have some money in my name only. The non taxable amount this year I know is $13,000. Does the 2009 contribution need to be written out (dated before dec 31st) or do we have until April and the end of the tax season to have the gift given? I know after Jan 1st she can gift again for 2010. I believe this is how it works according to an accountant friend of mine. Do you know if these gifts are excluded from the 5 year look back rule which applies to turning over ownership of a house?

Thanks

A:

For Gift Tax purposes, gifts are totaled up on a strict calendar year basis from January 1 through December 31.  The Gift Tax return (709), if applicable, is due on the same schedule as 1040s are, April 15 plus extensions.

So, to be a valid 2009 gift, you do have to receive the actual money before midnight New Year's Eve.

The look-back rules in regard to impoverishment planning for elderly Medicaid eligibility are state specific; so you all need to be working with an elderly law specialist in your area.

Good luck.  I hope this helps.

Kerry Kerstetter

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/30/2009 02:24:00 PM Send this post:

Q:

Hello Kerry,

I was wondering if you could help me out with a few questions. I have been doing quite a bit of extensive searching for the maximum gift exclusions for years 1994, 1995, and 1996 and haven’t been able to get anywhere. Was wondering if maybe you might know what these numbers would be? I found your website during the many searches I’ve done.

Thanks so much for your help in advance.

It was $10,000 for each of those years, as you can see in the attached chart, which was part of the more extensive history of the gift tax that you can download from here.

Good luck. I hope this helps.

Kerry Kerstetter

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/26/2009 01:05:00 PM Send this post:

Q:

Subject: Estate Tax Exclusion

Mr. Kerstetter,
I found your writeup on estate and gift taxes via google search, and then I read your blog with great interest.
Thank you for publlishing it.
 
You have this text on your page:

If you do give any one person more than the $13,000 during a single calendar year, you must file a 709 and either pay gift tax or use part of your lifetime exclusion.  When you pass away, the amount of exclusion that will be available on your estate tax return (706) will be whatever the exclusion is at that time reduced by the gifts you reported on 709s during your lifetime, where you opted to offset them with part of your lifetime exclusion.  If you never used any of the credit by keeping your gifts below the annual limits, the full amount of the credit will be available to your estate

My wife and I have six children, so we're trying to get some intelligent estate planning done. The lifetime exclusion I understand is now $3.5M.  Is this $3.5M total for the estate, or $3.5M for each heir?
 
Thanks for your help.

A:

I have a chart of the annual estate tax exclusions on my website.  

For people passing away in 2009, there is an exclusion of $3.5 million of net estate value per decedent.

The lifetime exclusion on gifts is set at one million dollars.

You should be working with an estate planning professional because there are a lot of changes on the horizon; so you want to make sure any plan you set up is flexible enough to be able to handle the changes.

Good luck.

Kerry Kerstetter

Labels: Estates, Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/21/2009 07:26:00 PM Send this post:

Q:

Subject:  gifts of 13,000

Good Afternoon,
 
If I am reading it correctly, it states that a married couple  can receive up to $52,000 a year.
Would it be done like this, My mother writing a check out for 13,000 to both my husband and I and then my dad writing a check for $13,000 to both my husband and I. Now the money would be out of the same account with both their names on the check. One signing 2 checks and the other signing the other 2 checks.  We are in Ct and they are in North Carolina. We are trying to buy a house and they want to give us money. Thank you.

A:

Gifting strategies are the kinds of things you and your parents should be discussing with your own personal professional tax advisors because there are several different ways in which they can be structured.

I noticed some aspects of gifting that you appear to be confused about.

First, there is no maximum amount of gifts that can be received.  For the recipients, gifts are exempt from income tax.  However, if you were to be given non-cash items, such as stocks or real estate, that have appreciated in value since your parents purchased them, there could be tax consequences when you sell them because you are required to maintain your parents' cost basis.

From the givers' (your parents) perspective, there is also no maximum that they can give away in a year.  However, if either of them were to give any person more than $13,000 during a single calendar year, they would be required to file a Gift Tax return (Form 709) to report that to IRS.  There is also a lifetime exemption of one million dollars of gifts per giver, so even if they exceed the annual $13,000 limit, they wouldn't have to actually pay any gift tax until they have used up the million dollars.

There is a provision in the tax law allowing for married couples to split their gifts if they are made by only one spouse from his/her separate money.  This enables both spouses to use their $13,000 annual exemption.

In the proposed plan that you mentioned, it sounds as if the bank account is jointly owned, so each could give you $13,000 and your husband another $13,000 without the need for any gift tax returns or gift splitting.  Added all together, that would be $52,000.

This was a rather lengthy way to say that your plan appears valid. However, there are ways to transfer even larger amounts of money without exceeding the annual limits that should be discussed with your own personal professional tax advisor.

For example, if you needed $200,000 right now, your parents could gift you the $52,000 in 2009 and loan you the additional $148,000.  In future years the principal of the loan could be forgiven as gifts in those years in increments of $13,000 or whatever the annual limit is in those years.

I hope this helps.

Good luck.

Kerry Kerstetter

Follow-Up:

thank you so much for getting back to me.

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/03/2009 09:13:00 PM Send this post:

Q:

Subject:  annual exclusion and lifetime exclusion

Dear Mr. Kerstetter,
 
I found and read you article on lifetime exclusions and annual exclusions dated September 2008. I enjoyed your satire and was wondering if there was a more recent version using the 2009 numbers.
 
I had a friend tell me his accountant told him his annual exclusions counted toward his lifetime exclusions and you article states otherwise. If you would, I would appreciate it greatly to know where to find the tax code referenced.
 
Thanks for the article.
 
Jim Younger

A:

That is very scary; that a professional tax advisor could be so off on such a basic principle of gift and estate taxation.

I updated my page on the Gift Tax  to reflect the new $13,000 annual exemption.  I also added links to download the IRS instructions for the 706 and 709, which should give you more detailed info.

Basically, if you look at the actual 709, you will see that it deals with "Taxable Gifts" when accounting for the lifetime exclusion and how much has already been used up.  Annual gifts of under the exclusion amount are simply not classified as Taxable Gifts and thus do not affect the lifetime exclusion.

Before deciding on any gifting scenario, you need to work with a professional tax advisor who understands these concepts.

Good luck.

Kerry Kerstetter

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/24/2009 08:27:00 PM Send this post:

Q-1A+B:

Subject:  Re: may I have your enlightened advice?

Dear Mr. Kerstetter,
 
My accountant recommended I contact you.
 
My stepmother gave me her house last year as a gift. She built it in 1968. I am her executrix.
 
How do I establish the basis for the house?
 
She didn't file a 709 gift tax return last year when she gave it to me so I will need a basis for her estate to pay those late taxes.
 
Then do I use that same basis for paying the 706 gift tax return this year?
 
Thank you so much.
 
Best Wishes,

 

Subject: Re: Is gift property to be included at death in one's estate?

 

Dear Tax Guru,

 

My stepmother gave me her house (worth over 1Million dollars) as a gift in 2007. She died in October 2008. Is that property considered part of her estate?

 

Are there any gift taxes owing at the time of death for that property or just the 709 gift tax return when she gave me the gift?

 

Thank you

A-1:

I'll cover both of your recent emails here since they are basically dealing with the same issues.

First off, it is obvious that you need to be working with experienced and up to date professional tax and legal advisors to make sure you do things properly here. As executrix, you should be aware of the potential personal liability you face if the Gift and Estate tax returns aren't prepared properly and filed with IRS.  A very high percentage of these tax returns are audited by IRS; so they will be looking to you to cover any deficiency they find.

Both Gift and Estate taxes are calculated based on the fair market values of the assets at the time of the gift and of death.  The original basis of assets transfered is generally only important for the recipients of gifts, who have to use the carryover basis as their own.

The gift of the home to you should have been reported on a 709 Gift Tax return.  Since the value of that gift alone was more than the million dollar lifetime exclusion, there will definitely be some gift tax due for that gift.  Before being able to properly prepare that 709, you will need to find out about other gifts made during your stepmother's lifetime because all or part of that million dollar lifetime exclusion may have already been used up.

The 706 Estate Tax return is one of the most time consuming tax returns to work on.  It is quite possible that part of the value of the home that was given to you, plus the gift tax that was required to be paid on it, will be included in the inventory of assets she owned as part of her taxable estate.  Again, an experienced professional tax advisor will be able to help you with this.

From your perspective, you do need to do some more homework to establish a carryover cost basis of the home that you can use when you either sell it or convert it to business or rental usage.  I'm assuming there are no records of what your stepmother paid for the home; so you will need to reconstruct the costs that were put into the house.  Using photos or whatever you can come up with, do your best to document the history of the house, starting with the purchase of the land and use estimates of the costs that would have been incurred for the construction and the major capital improvements.  You have to use your best estimate of the actual dollars spent in those earlier years.  There is no adjustment allowed for inflation.  Again, an experienced professional tax advisor can help you compile those costs and will prod you with questions about costs that you can't think of on your own.

Depending on your stepmother's personal history, there may also be other factors to consider, such as whether she inherited a share of the home from a spouse and if the state is community property or not.  That would give rise to a step up in the cost basis of all or part of the home.

Good luck.

I hope this helps.

Kerry Kerstetter

Q-2:

Dear Mr. Kerstetter,
 
Thank you so much for your advice. The house my stepmother gave me in September 2007 is in Portugal. In 1968 she and my father bought some land there (they both were US citizens) and built the house in question. The house and land were in his name. He willed all of it to my stepmother in 1997. There have been no upgrades or improvements since that time.
 
Should I contact the IRS to find out about any possible gift exclusions she might have had during her life? I don't know any other way.
 
Are you saying that MY BASIS FOR CAPITAL GAINS TAX when I sell is NOT the fair market value at the time of the gift but on what she spent to buy the land and build the house 40 years ago?
 
I have an accountant here in California and I have my American attorney in Portugal. He specializes in international inheritance law and said that he could help me fill out the 709 form. I think I should trust him. He is very experienced.
 
Thank you very much for your valuable time and information.
 
Sincerely,

A-2:

If you don’t have access to your stepmother’s professional tax advisor for copies of the gift tax returns, you can try submitting Form 4506 to IRS along with their $57 fee in order to get a copy of what they have.  See this page on the IRS website for more info.

Your starting basis of items received as gifts is the same as it was for the person who gave it to you. If the home’s value was much higher than that, you also accepted responsibility for the capital gain taxes on the difference when you received the gift.

I mean no offense to your current professional tax advisor, but if he doesn't now this very basic principle of taxation in the USA, I would be very worried about the depth of his skills in handling your other tax matters.

However, it’s your call; so good luck.

Kerry Kerstetter

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/25/2009 04:36:00 PM Send this post:

Q:

Subject:  Lifetime exclusion for gift taxes?

Dear Tax Guru,
 
On your website you say that the lifetime exclusion for gift taxes is 1 million dollars. My tax accountant in California says that the IRS publications say that it is 1 million dollars for estate taxes but $385,000 for gift taxes.
Can you enlighten me on this matter.
Thank you,

A:

Your accountant is obviously using reference materials that are seriously out of date.  That is very scary in the ever changing world of taxes to think that a tax guide from at least five years ago is still relevant today.

You can see the exemption amounts on my website.   

You can also download the IRS's forms and instructions from the IRS website.  

Good luck.

Kerry Kerstetter

Follow-Up:

Dear Mr Kerstetter,
Thank you very much for responding to my e-mail.
Sincerely,

Labels: Estates, Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/09/2008 11:37:00 AM Send this post:

Q:

Subject:  gifting

In the year of death can the surviving spouse make a $24000 gift to her daughter after her husband has passed away? She gets to claim him as an exemption in 2008 even though he died Jan 2008.Can she still use his annual gift exclusion to make gifts in 2008 after his date of death?

A:

What you are proposing is not allowed.  Once a person passes away, s/he can no longer make gifts or use the Gift Splitting option between spouses. Any transfers of assets owned by the deceased will need to be treated as a distribution of estate assets.

Even though the widow can't exclude the full $24,000 gift, the additional $12,000 can still be given tax free as part of her one million dollar lifetime exclusion, which may or may not make sense depending on the potential size of her taxable estate.

A qualified professional tax advisor should be consulted to work out the most sensible strategy.

Good luck.  I hope this helps.

Kerry Kerstetter  

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/27/2008 03:16:00 PM Send this post:

Q-1:

Dear Sir, Guru Kindly respond to me pl 1) I need to send a sum much more than 12 k to my son in USA , in one Financial year. I am a NRI, Indian, & have no USA limitations to send money to my son as 12k. from my side. As it is generated out of India & out of salary. 2) Now can my son receive money from me (parents) without any tax at his end. Will the Tax department treat anything above 12 k as other income & charge Income tax, for sum in excess of 12k. r forb that matter Gift tax? 3) Will it help us to send the money by increasing the number of Donors from our side to avoid tax from his end. We are clear to send , & have no problem with our tax regime. Kindly revert please

Kindly ignore my previous Email pl. pl. respond to the below instead pl. sub.What is the limit a Donee can receive cash gift in a Financial year in USA from single or multiple Non Resident, non US donor/s. 1) How can a donee in USA receive money from parents without any Gift tax at his end from a third country where they are employed? Is the Gift restriction of $.12k, is only for a USA Citizen donor? Will the Tax department treat anything above $.12.in USA as other income of the Donee & charge Income tax,/gift tax, for sum in excess of $.12k If received as Gift from out side country sent by parents. 2) Is there a restriction that amounts received by the Donee in USA, from a PARENT donor non US Citizen, out side USA should not exceed 12k? 3) Will it help the Donee to receive money by increasing the number of Donors, to avoid gift/income tax as other income from his end during a Financial year? Kindly revert please

A-1:

I have no knowledge or experience with the tax system in India, so my comments can only cover the USA tax systems.

You seem to be under the impression that people in the USA have to pay tax on gifts that they receive. That is actually not the case at all. Gifts are one of the very few things that are statutorily exempt from tax on the recipients. Any gift tax obligation, or even requirement to report larger annual gifts is on the giver (aka donor).

Again, I have no idea how the gifting taxes are structured in India; so you need to work with a professional tax advisor in that country.

However, for your relatives in the USA who will be receiving gifts from you, there is technically no dollar limit on the amount of gifts they can receive that are exempt from any taxes on them.

In addition, as their USA professional tax advisors should warn them, they should be sure to have excellent documentation of the fact that any monies received are in fact bona fide gifts and not for anything that could be construed as taxable, such as proceeds from the sales of assets or compensation for services rendered. Out tax authorities in the USA do operate from the presumption that any money received is automatically taxable income unless the recipients can prove otherwise.

Good luck. I hope this helps.

Kerry Kerstetter

Q-2:

Thank you Sir,

Yes, I am fully aware of the Tax Laws in India fully. Your notes surely helped. But a little doubt exists. pl. see below. I feel the term GIFT is only for the DONORs concern. For Donee it is an additional income as per below. (2)Does the Tax books say that a Donee

(1)they should be sure to have excellent documentation of the fact that any
monies received are in fact bona fide gifts and not for anything that
could be could be construed as taxable, such as proceeds from the sales of assets or compensation for services rendered.

(2) A resident of the United States, (Warning: A foreign citizen living in the United States for more than 182 days is considered a taxable U.S. resident by operation of IRS Code and is taxable on his world-wide income, even if he/she never did any business in the United States.

Does above (1) phrases over rides (2) for Donee. We have no problem here at all.

Thank you for your time, I appreciate your kind advice.

Regds

What do you think of this below please. It’s the law: "U.S. Persons" are taxable on their word-wide income, no matter what/where/when/how the source of such income, unless there�s an exception or exemption i.e. Tax Treaty. A GIFT is not under Tax treaty A "U.S. Person" is defined by Internal Revenue Code Section 957(d) as: A citizen of the United States, A resident of the United States, (Warning: A foreign citizen living in the United States for more than 182 days is considered a taxable U.S. resident by operation of IRS Code and is taxable on his world-wide income, even if he/she never did any business in the United States regds

Dear Sir, I have understoof your very helpful, simple advice. I am grateful. I am fully aware of Indian Laws. Only one thing i wanted to clarify is, My son who will be the Donee in USA, can he receive in ANY one particular Financial year indefinate amounts? Though our contribution & need is just 60k.$. to buy his first house to minimise loan from the bank. Will the tax authorities treat the gift from parents as a additional income to Donee, as USA Computes Tax on Global receipts. pl. see below A "U.S. Person" is defined by Internal Revenue Code Section 957(d) as: A citizen of the United States, A resident of the United States, (Warning: A foreign citizen living in the United States for more than 182 days is considered a taxable U.S. resident by operation of IRS Code and is taxable on his world-wide income, even if he/she never did any business in the United States) A domestic corporation, A domestic partnership; or An estate or trust other than a foreign estate or trust. Thank you kindly.

A-2:

I see why you may be confused; but the distinction is in the definition of "Income." Gifts are not considered to be income and are thus not taxable to the recipients (donees).

Taxable income is generally money received in exchange for something; such as services (wages), items (capital gains), or use of money (interest & dividends). Gifts, by definition, are not given or received in exchange for anything.

Your relatives here in the USA should be working with their own professional tax advisors in the USA who can give them more specific suggestions on how to properly document and report the gifts they receive.

Good luck. I hope this helps clarify things for you.

Kerry Kerstetter

Follow-Up:

Dear Mr. Kerry Kerstetter,

Your recent message clarifies my below doubt for

It's the law: "U.S. Persons" are taxable on their word-wide income, no matter what/where/when/how the source of such income, unless there's an exception or exemption i.e. Tax Treaty.

The point is " A gift received by a Donee in a single Financial year or more is not an Income by Definition."

We are much obliged.

with all Sincererity

While it probably doesn't apply in this case, I just wanted to add some more clarification on the reporting rules for people in the USA who receive gifts from outside of the country.

If more than certain amounts are received during the year, the recipient is required to file Form 3520 with our IRS, which is strictly informational and has no actual tax obligation.

The following is from the instructions for Form 3520 for who has to file it:

4. You are a U.S. person who, during the current tax year, received either:

a. More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or

b. More than $13,258 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.

I thought you said your goal was to gift $60,000 to your kids, so this shouldn't apply; but they should check with their own personal professional tax advisors in the USA.

For further info, you can download the 3520 and instructions from the IRS website.

I hope this info is useful for you.

Kerry Kerstetter

Thanks a lot Mr. Kerstetter,

I understood what you have said. So to avoid any unforeseen complications, what we are trying to do is, by Dec-2008 my wife & I will make 2 gifts of $.12 k each =$.24k. Later in January-2009, will make another $.12K x 2=$.24K. sO we are within Laws.
Rest we may do it subsequently in the same year or following year.

As I read below the provisions of form 3520, may not apply,as we are not gifting more than 100k in a year or even cummulatively in years, nor we are foreign corporation, nor partnerships. I feel we are within Laws. We try to be Law abiding citizens every were. We have no large amounts to give, as what we give is out of affection to our wards. Just a sacrifice.

Since $.24k from parents is allowed, in any 1 single Financial year, I may feel the question of filing form 3520 may not necessarily be required or if he does it there may not be harm to keep peace of mind.

However, I saw you placing my query on your NEWS Bulletin. Thank you, it may help many over there.

Kind Regds

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 9/17/2008 01:48:00 PM Send this post:

Q:

Subject: Tax free gift question

My grandmom gifts us money each year
12,000

For example we are all married but she does not gift the spouses

can she gift each grandchild 24,000 for example writer me the check for 24,000 because I am married?

But without it being written, handed to or directly given to the spouse in anyway?

Or does 12,000 have to be written in my name and 12,000 in my wife's name?

A:

 The annual gift tax exclusion is currently $12,000 from any individual to any other individual.  I'm not clear how you came up with the idea of her being able to give $24,000 to one grandchild. That makes no sense.

If your grandmother wants to give $12,000 to you and another $12,000 to your wife, two separate checks would be the cleanest way to do this. Giving one $24,000 check to you would look too much like that was a gift to just you and would require her to file a Gift Tax return.

Gifts are completely tax free for the recipients and any tax or return filing requirements are the responsibility of the giver, your grandmother.  She should be working with her own personal tax and estate planning professionals to plan out the best strategies for her situation and goals for her family.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

thanks

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/20/2008 07:00:00 PM Send this post:

Looking at my backlog of questions to post, I noticed several related to gift taxes; so I’m doing a rare combination post.  Each of the following questions was from a different person.

Q-1:

 Mr. Kerstetter, CPA,
Your column regarding estate/gift tax in the website  is very informative. I have one simple question. In 2010, gift tax is repealed. Does it mean that one can transfer any amount of money as gift in that year without having to pay any gift tax? I am looking forward to hearing from you.

Sincerely,

A-1:

Your information is incorrect.  For people passing away during 2010, there will be no estate tax because that tax only is repealed for that year.

However, there is no similar repeal scheduled for the Gift Tax for 2010 or any other year.  That will be treated in the same manner as we currently have.

It is confusing because the limits and many of the rules for Estate and Gift taxes used to be in sync with each other.  However, a few years ago our imperial rulers in DC decided to separate the two taxes in a way and have different rules for each.

I hope this helps.  You should be working with your own personal professional tax advisor if you have big gifting plans in mind.

Good luck.

Kerry Kerstetter

Q-2:

Thank you for posting very useful information on your web site. You stated  that the current annual gift tax exlusion allownace is $12000. I will appreciate if you can advise whether this limit will be increased in the near future. If yes, to what amount and in what year?

A-2

The annual limit on gifting with no gift tax consequence is by law only increased in increments of $1,000 when the cumulative cost of living factor (inflation) since the last adjustment warrants it.  This is reviewed each year after the end of August, covering the CPI increase from 9/1/07 through 8/31/08 for the next adjustment.

Considering the potentially large cost of living increase we are all suffering through right now, especially in terms of the skyrocketing costs of energy, transportation and food, I am guessing that for 2009, there will be more than enough of a cumulative increase in the CPI to raise the annual limit to $13,000.

I hope this helps you plan things.

Kerry Kerstetter

Q-3:

A-3:

Gift taxes and estate taxes are an integral part of the same tax system, which is separate from the income tax system.

To prevent people from giving away enough of their wealth to avoid estate taxes when they pass away, there are potentially taxes on gifts made during the person's lifetime.  To avoid being too ruthless, there has long been an annual exemption from gifts which are subject to this tax. This is currently $12,000 in a calendar year per donor (giver) per donee (recipient).  No gift tax return is required if all gifts during a year are under that limit.

In addition to the annual limits, each person also has a lifetime exclusion of one million dollars of gifts that can be made without having to pay gift taxes.  These gifts do have to be reported to IRS on Form 709 and will reduce the amount of the estate that will be free from estate tax after the person passes away.

So in your example, if your aunt had used up $100,000 of her lifetime gift exemption while she was alive, when her estate tax return is prepared, her tax free amount will be reduced by that same $100,000.

Gifts are calculated based on the current fair market values of the items being given.  You can download the gift tax Form 709 and its instructions from the IRS website:

http://www.irs.gov/pub/irs-pdf/f709.pdf

http://www.irs.gov/pub/irs-pdf/i709.pdf


I hope this clears up your confusion.

Kerry Kerstetter

Q-4:

Would you please answer a question about check date versus date check cleared donor's account?  Here's the situation:

 

    Donor writes and gives $10,000 check December 12, 2007 and is alive when check clears donor's bank January 4, 2008 and this is the only gift to recipient in 2007.  

 

    Donor writes and gives $10,000 check April 1, 2008 and donor is alive when the check clears donor's account April 7, 2008 and this is the only gift to recipient in 2007.

 

Question:

 

    Are these gifts made in separate years concerning the annual gift tax exclusion?

 

Thank you in advance for your opinion or some lead to the answer.

A-4:

I'm sorry, but I have had a long standing policy of not answering homework questions for people.  I don't have enough time to answer as many real world questions as I would like to.

Good luck.

Kerry Kerstetter

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/07/2008 12:57:00 PM Send this post:

Q:

Subject:  Gift tax question

Hello:  I read your blog, but could not figure out how to ask you a question.  My 90 year old mother died in 9/2007.  Prior to her death she had been gifting $12,000 per person and paying tuition directly to institutions.  The estate has not yet settled because the executor asked for an extension.  I just received my tuition bill for $11,000.   1) Do the $12,000 per person gifts continue after death, and 2) do the tuition payments continue after death?  When you answer, could you point me to the appropriate IRS literature?  Thank you,

A:

This isn't really a tax issue that you are dealing with.  It is more of an estate settlement issue that you need to work out with the attorney and executor who are handling the disposition of your mother's estate. Some of the exact answers will depend on the rules for your mother's particular state of residence when she passed away.

Basically, when a person passes away, her ability to make gifts terminates at the same time.  So, the annual gifts your mother was giving you can't continue.

however, this is when her will or living trust kicks in.  She may have left you a lump sum of money to use to continue your education or she may have designated that a trust be established for your benefit, out of which your tuition will continue to be paid.  Both of these, as well as other variations and combinations, are common estate planning scenarios.

Again, you need to consult with the attorney and executor to see how you will be affected.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry: Thank you so much for your response!  I thought that her ability to gift died with her, but I could not find anything that actually said it.  Sincerely,

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/22/2008 11:12:00 AM Send this post:

Q:

Subject: Tax Free Gift

The maximum tax free gift for 2007 was $12,000 per individual. Is this the same for 2008?

 

Thank You.

A:

 Yes it is.

By law, this figure is only allowed to be increased in even $1,000 increments; so it takes a number of years' worth of cumulative inflation before it is bumped up.

Kerry Kerstetter

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2008 12:29:00 PM Send this post:

Q:

Subject: Cash Gifts

My 90 year old grandfather has been giving my brother and I $11,000 each for the past 2 years. I do his taxes but have not been showing these payments on his tax return as he does not itemize. How do I show these as cash gifts? Do I have to itemize to do this?

 

Thanks for any advice or tips you may have.

A:

Gifts are not shown anywhere on income tax returns, either for the giver or the recipient.  They are not deductible by the giver, nor are they taxable income to the recipients.

The Gift Tax system is actually separate from the income tax system.  If your grandfather were to give any single person more than $12,000 during a calendar year, he would have to file a Gift Tax return (Form 709).  There are exceptions for certain other kinds of expenses, such as medical and education costs.

If he starts giving away more than the annual $12,000 tax free limit, he should be working with a qualified professional tax advisor.

You can see more about the Gift Tax on my website. 

Good luck.

Kerry Kerstetter

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/09/2008 08:03:00 PM Send this post:

Q:

Sorry to bother you, but could you tell me if a husband and wife can EACH receive $12,000 (and stay within the legal limits) from the same donor, say one of the parents of the husband or wife?
 
Thanks!

A:

For gifting purposes, each person, including spouses, is subject to his/her own limits.  Thus, gift splitting between spouses has long been a standard tactic to essentially multiply the amount of wealth a husband and wife can transfer tax free to their kids and grandkids.

The annual maximum without requiring any need to dip into the million dollar lifetime exclusion is currently $12,000 from each donor (giver) to any one donee (recipient).  For example, say a married couple has a married daughter.  The father can give $12,000 to their daughter and another $12,000 to their son in law.  The mother can give another $12,000 to the daughter and another $12,000 to the son in law.  This makes a total of $48,000 that can be transferred tax free during each calendar year.  If there are grandkids, the older parents can also each give another $12,000 to each of their grandkids. 

Since gifts of any size or total amount are always tax free for the recipients, the potential gift or estate tax hit is on the donors (givers) if they give away too much.  Therefore, it is critical for them to work on any gifting and estate planning scenarios with their professional advisors.

There are also other aspects to consider, especially if the gifts are not of after tax cash.  Gifts of appreciated assets carry with them potential capital gains taxes on the recipients if and when they sell those items; so deciding exactly what is transferred is something that should be done with the assistance of professional advisors. 

FYI: Here is an excerpt from the QuickFinders Tax Planning For Individuals that covers this point.

Annual Gift Tax Exclusion

A taxpayer can give $12,000 per person (for 2007) to any number of recipients in a calendar year without paying federal gift tax. An unlimited amount can be given each year as long as no recipient receives more than $12,000. Gifts that qualify for this annual exclusion are never taxed­no gift tax is owed when the gift is made, and the gift is not taxed at death. If a gift is over $12,000, only the excess is a taxable gift. The annual exclusion is indexed for inflation and will change again when cost of living adjustments reach the next $1,000 multiple.

Present interest required. To qualify for the annual exclusion, a gift must be a present interest­the recipient must have all immediate rights to the use, possession, enjoyment and income of the property. The annual exclusion does not apply to a future interest­the recipient’s rights to benefit from the property begin at some future date. Most gifts to trusts do not qualify for the annual exclusion because they are gifts of future interests. Exceptions include gifts to a minor’s trust and gifts to a trust that includes a Crummey power.

Gifts from married couples. Each spouse has an annual exclusion. Couples can therefore transfer a combined total of $24,000 to a single recipient in 2007 and not exceed their combined annual gift tax exclusions.

Gift splitting. If a gift in excess of $12,000 is made by only one spouse, the couple can use both annual exclusions by filing gift tax returns electing to split gifts. A gift-splitting election applies to all gifts made by the couple in a calendar year and attributes one-half of each gift to each spouse.

Community property. Gifts of community property are considered for federal gift tax purposes as made half by the husband and half by the wife. This results not from gift splitting, but from federal recognition of the state’s community property rules. Thus, a gift-splitting election is not needed for community property gifts.

Qualified Transfers--Tuition and Medical Care

Direct payment of medical expenses or tuition for another person is not a gift for gift tax purposes [IRC §2503(e)]. Payment must be made to the school or medical provider and not to the beneficiary. The beneficiary of a qualified transfer does not need to be related to the taxpayer. A qualified transfer does not prevent the donor from making an annual exclusion gift directly to the beneficiary of the qualified transfer. Qualified transfers are not reported on Form 709.

Tuition. Tuition paid to primary, secondary, preparatory or high schools, and colleges and universities for another person qualifies for the tuition exclusion.

Payments for books, supplies, dormitory fees and board do not qualify. Tuition for part-time students qualifies.

Medical care. Medical payments can cover any type of expense deductible for income tax purposes, including payment of insurance premiums.

Transfers to QTPs

Contributions to a qualified tuition program (QTP) are not direct payments of tuition excluded from the gift tax as qualified transfers. However, these contributions are considered gifts of a present interest and are eligible for a special election spreading them over five years.

Follow-Up:

Kerry,
 
Thank you very much. This helps a lot!!

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/23/2007 11:20:00 AM Send this post:

Q:

Subject: Questiion about the gift tax and exclusions

 

Hello,

    My sister and I have a question about the gift tax exclusions.

This year the max. gift is $12,000 per person annually. But there is a $1,000,000 "Lifetime exclusion"

My sister belives that means that the doner can give a lifetime of 1 million in gifts (which includes the 12k per person annually) and anything over that is taxed. But I think that the 1 million lifetime exclusion means that whatever is over the annual 12k per person is deducted from the 1million. So if someone is given 30k in one year as a gift - 18k (30-12) is deducted from the lifetime one million.

Could you please clarifry this for us?

 

Also, if the 1 million exemption is not reached by the time somone dies- can it be given after death without being taxed? on top of the 2 million Estate exemption from taxes?

 

Thank You so much,

A:

You really need to be discussing any kind of gifting program with your own personal professional tax advisor because there are many ways to accomplish whatever it is you want to.

However, I can clear up some of your misunderstandings.

First is the issue of gifts versus bequests.  Gifts are only made while a person is alive. Once the person passes away, gifts are no longer possible.  Bequests, per the instructions in his/her will or living trust, are the way items are passed from the deceased to whomever s/he wants to transfer things to. 

This is an important distinction because a person can give away up to one million dollars worth of assets above the annual tax free amount while s/he is alive.  If more than that is given while the person is alive, s/he must file a gift tax return (709) and pay gift tax to IRS.

After a person passes away, s/he is subject to the estate (aka Death or Inheritance) tax.  Under this tax system, the amount of the estate that is not subject to any estate tax varies depending on the year in which the person passes away.  As you can see on the chart on my website,   people passing on during 2007 have a two million dollar exemption. 

The way this interacts with the one million dollar lifetime gift tax exclusion is that, on the Estate Tax Return (706), the total amount of the lifetime gifts used during the person's lifetime is added back to the gross estate's value.  The net effect is basically to reduce the tax free exclusion from the estate tax.  For example, if $500,000 of tax free gifts had been used by someone who passed away in 2007, this would be added to the value of his taxable estate on the 706.  After reducing the estate tax by the credit for the $2,000,000 allowance, it works out to be the same as if he only has $1,500,000 eligible for exemption from estate tax.  The actual calculation is a little trickier than this, but it's an easy way to understand the concept.

So, your concern about the unused portion of the million dollar lifetime gift allowance is moot.  Whatever hasn't been used while the person was alive will end up resulting in a higher exemption from the estate tax.  For example, someone who passed away in 2007 without utilizing any of his million dollars in tax free gifts will have the full $2,000,000 available for his estate tax.

In regard to the annual gifting allowance and the lifetime exclusion, your explanation is the more accurate one.  Someone making gifts that don't exceed the limit of $12,000 to any one person during any calendar year will not have to file any gift tax returns and will not have used up any of his/her million dollar lifetime allowance.

Someone who does give any single person more than the $12,000 during a single calendar year will have to file a gift tax return to report that and show how much of his/her lifetime exclusion is being used up at that time, as well as how much of the million dollars is remaining.  Only the amount above the annual allowance needs to be deducted from the lifetime exclusion.  As in your example, someone giving another person $30,000 during a single calendar year would only have to claim $18,000 as coming off of the million dollar lifetime exclusion.  Each person is required to keep a running tally of how much of that million dollars has been used up during his/her lifetime so that the person preparing the final estate tax return can show the final cumulative amount.

As I said at the beginning, there are a number of very common gifting strategies, such as gift splitting between spouses, loans and debt forgiveness, and dividing gifts up between different family members, that can easily allow people to avoid having to ever dip into their lifetime exclusion at all  These need to be planned out with the assistance of a professional tax advisor.

I hope this helps you understand this topic a little better and how important it is to have professional assistance before actually doing anything in this area.

Good luck.

Kerry Kerstetter

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/28/2007 01:21:00 PM Send this post:

Q:

Subject: Re: Gifts Tax Free For Recipients

Good morning, Kerry.   I'm assuming the question had to do with cash gifts rather than of appreciated assets.  I've seen some surprised people when the recipients of appreciated assets were told that they received the basis of the donor.

 

In our charitable giving world, we tell people to, where possible, give cash to family and appreciated assets to charity.

A:

That particular email did have to do with cash; but you are correct in noting the carry-over basis aspect to non-cash gifts.

As I have discussed on a number of occasions, it is a bit more complicated than simply donating appreciated assets to charity.  Another part of tax and gifting plans often involves deciding which family member has the lowest tax bracket and either gifting or holding those assets so that person can sell them with the lowest tax bite. 

Thanks for writing.

Kerry Kerstetter

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/10/2007 05:49:00 PM Send this post:

Q:

Subject: Re: Skirting Gift Limits

The following is, of course, a great technique.  However, I'd use your typical admonition to engage the services of a qualified tax professional to make sure that this arrangement doesn't trigger the imputed income rules.

 

"A common technique used to get the cash into the childless couple's hands now, without exceeding the limit, is to loan them the extra amount now and then forgive that debt in future years as gifts in those years."

 

Thanks.

A:

That is absolutely right.  I would hope that, after years of warning people how dangerous it is to function without the assistance of competent professional tax advisors, it would go without explicitly stating that every time.  However, it doesn't hurt to remind people of that fact once again.

Kerry Kerstetter

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/10/2007 05:42:00 PM Send this post:

Q:

Subject: gift tax question

My mother will be selling property soon that I was supposed to inherit upon her death. I am supposed to receive the proceeds, but instead of her gifting me the property, I have been advised that she should sell the property in her name to pay lower capital gains rates and alternative minimum taxes than I would since my annual income is much higher and gift the after capital gains tax proceeds to me.

 

I was told that she could give a one time gift of up to $1,000,000 exempt from gift tax but subtracted from her eventual estate. In other words, for 2007 the gift of $1,000,000 would reduce her exempt estate taxes to $1,000,000 from the $2,000,000 current limit. I have been assured by my CPA that is the case, but I can find nothing online including IRS.gov that mentions anything other than a $12,000 annual exemption from gift taxes.

 

This deal is based on my ability to receive the after tax proceeds (approx. $850K) without any gift taxes being paid by my mother in addition to the capital gains taxes. If both capital gains taxes and gift taxes applied to these funds the government would end up with more of the proceeds than we would. I appreciate any advice you can share.

A:

You need to check IRS Publication 950.  It explicitly mentions the lifetime exclusion of $1,000,000.

Here is a link to that part on the web.

To see the entire Pub. 950:

Web-Friendly HTML

Downloadable PDF

Good luck.

Kerry Kerstetter

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 7/09/2007 07:22:00 PM Send this post:

Q:

Subject: gift taxes

Hi,

So to clarify the gift tax law.......the recipient has no tax ramifications if the gift is over the legal limit. For instance if I gift someone 12,500 they have no responsibility for any tax on that money?

Thankyou,

A:

That is true in almost all cases.  However, if you give someone pre-tax money, such as an IRA or other retirement account, that money will be taxable to the recipient.  Every other kind of gift of after-tax money is completely free of income tax for the recipient.

However, the giver will have to file a gift tax return (709) to report gifts to any single person in any calendar year in which the total exceeds the annual exemption.

Also, be aware of the fact that gifts do not reduce the taxable income of the giver, a very common misconception that people have.

Before any large size gifting program is implemented, you should work with your personal professional tax advisor to ensure that you understand the rules and implications of what you are doing.

Good luck.

Kerry Kerstetter

Follow-Up:

thankyou

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 7/01/2007 08:27:00 PM Send this post:

Q:

Subject: Question about gifting

I understand the $12,000 limit for individual gifting, but I have a scenario I would like your opinion.

What if parents want to gift equal amounts of money to their 2 grown children; both are married, but one has 2 children, the other no children? So for Family A (with 2 kids) the maximum gift is $96,000 while for Couple B (no kids) the maximum gift is $48,000. Now can Family A gift Couple B $24,000 so that each child has received $72,000 from the parents without any tax consequences?

A:

You wouldn't believe how often that kind of re-gifting scheme comes up when people ponder ways in which to "out-smart" the annual tax free gifting limits. 

It's not allowed and would be considered fraud if IRS were to discover it. A true bona-fide gift can't have any conditions on it, especially that the money be given to someone else.

If you want to stay under the annual limits, there are a number of ways in which to accomplish the kind of equal distribution that you are desiring.

The simplest is to merely wait until the beginning of the next calendar year, when there is a new $12,000 per donor per donee limit available, and gift the childless couple the additional money.

A common technique used to get the cash into the childless couple's hands now, without exceeding the limit, is to loan them the extra amount now and then forgive that debt in future years as gifts in those years.

There are also a few types of transfers that aren't considered gifts subject to these limits.  The most common types are payments for medical and education purposes.  Depending on the circumstances involved here, if the parents were to pay for the childless couple's college tuition and/or medical care, those amounts can be in addition to the $48,000 of direct cash payments.

As you can see, it can get tricky; so the services of a good professional tax advisor would be advisable.

Good luck.  I hope this helps.

Kerry Kerstetter
 

 
Follow-Up:

Dear Kerry,

Thank you for your answer. Your reply broke the tie. My CPA says the same thing as you did.

My father's CPA says there is nothing wrong with the "scheme." He says after you gift the money, the person receiving the money then makes his/her own gift to the 3rd party and he/she is allowed to. But I think that the spirit of the gift limits, and the intentions of the gifting is what is at issue.

Thanks again.

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/14/2007 11:31:00 AM Send this post:

Q:

We want to give our grandkids some money.  Is it true that we can’t give them any more than $10,000 without triggering tax problems for them?

A:

The current limit for gifts without the need to file any gift tax returns is $12,000 per donor (giver) per donee (recipient) per calendar year.

I have this explained on my website. 

I hope this helps.

Kerry

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/27/2007 12:46:00 PM Send this post:

Q:

Subject: Capital Gains Taxes Aren't for the 'Kiddies'

Let me see if I understand this in a real world application:

My 80-yr old mother, living on welfare, needs to pay for something (home repair, what have you) but doesn't have the money (say $5,000).

I could sell some stocks and give her the money, but we'd both be better off if instead of giving her the money I gave her the stocks that she could then sell.

Sound right?

A:

Decisions like this would obviously be on a case by case basis.  However, if you have highly appreciated assets, such as stocks, that would trigger a large capital gain tax, shifting that tax to someone in a lower tax bracket could result in some tax savings. 

This obviously needs to be balanced out with the hassle and cost of transferring the title to the asset, as well as the possible cost and hassle of having to prepare Gift Tax returns if the total current fair market value of gifts to any one person during a calendar year exceeds $12,000.

Kerry

Follow-Up:

Oh.  I forgot to mention it was merely a hypothetical.  I wasn't seeking actual advice.

I knew something was off from the article.  Apparently it was that the writer never mentioned the cost of transferring title to the assets.

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/27/2007 12:31:00 PM Send this post:

Q:

Subject: Re: Help!

 

Is there a way to find out what the annual tax free allowance for gift tax was back in 1957?
Thank you!!!!!!

A:

It was $3,000 during the years 1943-1981.

I found this via a Google search that led me to this post from Paul Caron.

If you download the report he cites, you will see a very comprehensive history of the Gift Tax.

Kerry Kerstetter

Follow-Up:

Thank you!!!!!!!!!   Thank you!!!!!!!!!   Thank you!!!!!!!!!   Thank you!!!!!!!!!  

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/07/2007 10:13:00 AM Send this post: