Gift Tax Question

[TromboneAl]

Sorting out my mom's expenses...

In 2005 Mom and my sister both sold their houses, and purchased one new house. Mom contributed $190,000 for the down payment, and the house was purchased in sister's name (along with BIL). IOW, Mom gave sister $190,000 which was used for a down payment.

But sister says there was no payment of any gift tax. Should there have been??

 

[Spanky]

http://law.freeadvice.com/tax_law/gift_tax_law/143/

The Economic Growth and Tax Relief Reconciliation Act of 2001 did not abolish the gift tax as are the estate and generation-skipping transfer taxes. The law retained the $10,000 per year per donee exemption, although the amount is indexed annually ($11,000 for 2004 and $12,000 starting January 2006). The lifetime exemption from gift tax is fixed at $1,000,000 which means that gifts above that amount are subject to tax under the same rate schedules as the estate tax until 2010 (in 2011, the rate reverts back to a top rate of 55%).

Gift Taxes basically are taxes that supplement the Estate Tax. Gift Taxes are placed on gifts given away to any person while you are still living. You may give up to $11,000 a year (or $12,000 starting January 2006) in cash or assets to an unlimited number of people each year without incurring Gift Tax liability -- so long as there are no strings attached. Married couples can give, as a couple, a $22,000 gift (or $24,000 starting in 2006) per year to as many people as they want. If you give more than the limit annually, the excess is applied toward your lifetime gift-tax exclusion. If at any point the gifts you gave during your life or left in your estate exceed that exclusion, you pay gift tax on the excess amounts over $1,000,000. Of course, any gift transferred between spouses (where both are US citizens) of any size is 100% Gift Tax-Free.

In actuality, the payment of Gift Taxes is relatively rare, thanks to the annual exclusion, and the unlimited marital and charitable deduction.

When does a gift become taxable?
Gifts totaling more than $11,000 (or $12,000 starting January 2006) to one person in one year are considered a taxable gift and generate a potential Gift Tax. It does not matter if you give one $12,000 gift or 12 gifts of $1,000 each, or one gift of $10,000 and a "birthday gift" of $1,000. Gifts of a "future interest", no matter what their value, also are considered a taxable gift.

Gifts beyond the exemption limit (there is an exception for gifts that are directly paid by the gift giver for tuition and medical expenses) are considered "taxable gifts."

Taxable gifts generate a Gift Tax. But Gift Tax is not due until you give away over $1,000,000 in your lifetime.

In short, she does not have to pay any gift tax until $1mil is received.

 

[LOL!]

No gift tax probably due as Spanky wrote, but a gift tax return should've been filed showing that no tax was due.

http://www.irs.gov/publications/p950/index.html

 

[Leonidas]

No gift tax probably due as Spanky wrote, but a gift tax return should've been filed showing that no tax was due.

http://www.irs.gov/publications/p950/index.html

That seems to be right. A Form 709 should be completed showing the gift. The form already has the unified credit maximum amount ($345,800) printed on line 7. Also, the form has to be sent to the Cincinnati office of the IRS. The form, and any tax, is due just like any other return - April 15th of the following year. According to the form's instructions, there are penalties for late filing and it says that a written explanation should be attached to late returns giving an explanation to show reasonable cause for filing late.

 

[scrinch]

You may give up to $11,000 a year (or $12,000 starting January 2006) in cash or assets to an unlimited number of people each year without incurring Gift Tax liability.

But Gift Tax is not due until you give away over $1,000,000 in your lifetime.

I guess I've never really understood the gift tax. How are these two statements compatible, and who incurs the tax liability, the giver or the givee? Is there any income tax liability on the gift for the recipient?

 

[mathjak107]

its been joked about at the irs that whenever someone actually files a gift tax form that a bell is rung....since unless someone has an audit the filing of the gift tax form is basically on the honor system......rarely if next to ever are these forms actually filed according to sources at the irs.....

 

[Martha]

Our estate planners file or see to the filing of gift tax returns all the time as part of their succession planning practice.

Every once in a while they arrange for late filed returns for people who didn't know they needed to file the return. I imagine the penality is small in situations like Al's mom where no tax was due.

The giver incurs the tax liability. Think of the gift tax as similar to the estate tax.

 

[mathjak107]

well the estate tax is well documented and is an actual form that has to be filed,no exceptions...you may not owe tax but the form must be done...until all taxes are paid things cant go thru probate...the gift tax is not really trackable unless one of the parties has an audit for another reason and its uncovered....it kind of stays under the rader most of the time and most of the population never files it...every parent who put a child on a deed has to technically file it...every one who added another person on to a bank account has to file it if its over the limit but no one ever does.....

 

[Leonidas]

I guess I've never really understood the gift tax. How are these two statements compatible, and who incurs the tax liability, the giver or the givee? Is there any income tax liability on the gift for the recipient?

Relatively small gifts can avoid gift taxes by being below the annual exclusion (currently $12,000). Also, gifts to a spouse and certain gifts to pay educational or medical expenses are not subject to the gift tax. On top of that, everyone gets a lifetime tax credit on gift taxes - currently $345,800 - that will offset the tax that would be due on gifts that exceed the annual exclusion. The $345,800 is what the tax would be on $1,000,000 in gifts.

So, as in the case of Al's family, his mother gave $190,000 in gifts to her daughter and SIL. $24,000 of that would be under the annual exclusion amount (a $12,000 gift to daughter and a second $12,000 gift to SIL) and the remaining $166,000 is taxable. However, since there is a lifetime credit of $345,800, whatever tax that would be due on the $166,000 is offset by the credit. The credit is permanently reduced by the amount of taxes that would have been applied.

None of that is really an issue for people with estates less than $1 million. For folks with bigger estates, their estate planning usually counts on being able to leave that million without hitting the gift tax. They try to avoid taking away from the lifetime credit by keeping their gifts below the $12,000 annual amount, or paying for loved ones' medical and educational expenses.

 

[Nords]

None of that is really an issue for people with estates less than $1 million.

The only issue here is filing the gift-tax form to document the event.

Otherwise the whole situation could turn ugly during probate. IRS may not care about the form's filing but there will be concern over ensuring that the lifetime limit was not exceeded.

 

[Leonidas]

The only issue here is filing the gift-tax form to document the event.

Otherwise the whole situation could turn ugly during probate. IRS may not care about the form's filing but there will be concern over ensuring that the lifetime limit was not exceeded.

You're right and that was my original reply to Al. And to continue on this thought, what about State gift taxes? Googling the term "gift tax" brought back a number of hits for state governments and their gift tax laws. I don't know where Al's family lives, but they might want to look at the state law for gift tax issues as well.

 

[scrinch]

Relatively small gifts can avoid gift taxes by being below the annual exclusion (currently $12,000). Also, gifts to a spouse and certain gifts to pay educational or medical expenses are not subject to the gift tax. On top of that, everyone gets a lifetime tax credit on gift taxes - currently $345,800 - that will offset the tax that would be due on gifts that exceed the annual exclusion. The $345,800 is what the tax would be on $1,000,000 in gifts.

Thanks for the good, clear explanation.

 

[TromboneAl]

Thanks guys. That's good news, although I am sure surprised to hear it. They are in Washington state, and my googling found that there is no gift tax in Washington.