Fall has officially begun, and as October begins, so does the holiday season. Now is the time many begin thinking about gifts for loved ones during the next few months. If you give large gifts, you may be obligated to report it to the IRS.
For 2014, everyone has an annual exclusion amount of $14,000 (or $28,000 for married filers). That means that if you want to give someone a gift larger than that, you’re going to need to report it to the IRS and have you pay a tax on the total amount or worth of the gift.
What is considered a gift?
According to the IRS, a gift is defined as “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”
Now, keep in mind this is an annual exclusion, so if you’re giving someone a down-payment for a house and you can give it in installments, it would be fine to give $10,000 this year, which is under the allowed annual exclusion gift tax amount, wait a month, and exclude the second installment of the down payment from next year’s annual exclusion gift tax amount.
The annual exclusion applies to gifts to each recipient. If you give each of your children $14,000 on or after January 1, 2014, the annual exclusion applies to each gift. Together, you can give $28,000 to each recipient on or after January 1, 2014.
What can be excluded from gifts?
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.
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Gifts that are not more than the annual exclusion for the calendar year.
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Tuition or medical expenses you pay for someone (the educational and medical exclusions).
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Gifts to your spouse.
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Gifts to a political organization for its use.
This is one reason charitable giving is so great, not just during the holiday season when people in need might be dealing with the difficulties of cold weather, but anytime of year. Charitable donations are tax-free. If you have a couple extra cars in working condition that you don’t need anymore and don’t want to go through the hassle of selling, or if you want to give them to someone who needs a working vehicle, you can donate the cars to a charity and, even if the total amount is more than $14,000, it’s tax free because it’s a charitable donation.
What if you gift above the exclusion amount? In addition to having a CPA prepare a Form 709 Gift Tax Return, you’ll want to provide the following information:
- Copies of appraisals.
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Copies of relevant documents regarding the transfer.
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Documentation of any unusual items shown on the return (partially-gifted assets, other items relevant to the transfer(s)).
Still have questions? Contact us by completing the form below for more information on gift-giving, the gift tax, and charitable donations.
