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Understanding The Gift Tax and How it is Being Enforced

Understanding The Gift Tax and How it is Being Enforced

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As you have by now heard from a variety of sources, one way the federal government is raising revenue is by strictly enforcing existing tax codes and by hiring a vast number of new revenue agents to take a hard look at many of the issues that are commonly ignored or not reported.

One recent example of this is the gift tax, which according to some reports, is being more strictly enforced and has started with an IRS review program in 15 states.

This makes sense (at least to the IRS) both from a government-revenue perspective and from an estate-planning perspective. Many people are making large lifetime transfers of real estate and other depressed assets that will now need to be held for some time to regain their true or potential value in an effort to take advantage of the current $5 million lifetime exemption limits which most planners expect to roll back to $1 million in 2013.

Below are details and examples taken directly from the IRS website, along with a link to the original context. The accounting professionals I work with to solve client issues and I think this is important for a number of reasons:

1. It’s the law. Non-compliance can subject you to penalties, interest, and an audit of all your accounting procedures;
2. The IRS is actively looking for this violation in a concentrated way;
3. Failure to properly document a transfer or gift can create issues for both the Grantor (giver) and the Donee (recipient);
4. A common failed amateur asset-protection strategy employed by physicians includes “gifting” of assets to children, parents, and other relatives. The detail of the gift tax return is routinely overlooked and is often the source of a challenge and failure of that poor planning as we previously discussed in detail in the article, Fatal Flaws in Physicians’ Asset Protection Planning – Part II

Please note that the references and examples from the IRS website quoted below specify 2009, 2010, etc. That’s because the IRS has not updated its website, presumably because the law has not changed. Remember that articles like this are general, illustrative, and never replace the advice of a good CPA that is working with your numbers and details.
 

What is the Gift Tax?
The gift tax applies to transfers by gift of property. You make a gift if you give 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 at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift. In 2010, any transfer of money or property in trust is a taxable gift unless the trust is treated as wholly owned by the donor or the donor's spouse.
 

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:

• Gifts, excluding gifts of future interests, that are not more than the annual exclusion for the calendar year,
• Tuition or medical expenses you pay directly to a medical or educational institution for someone,
• Gifts to your spouse,
• Gifts to a political organization for its use, and
• Gifts to charities.

Annual Exclusion
A separate annual exclusion applies to each person to whom you make a gift. The gift tax annual exclusion is subject to cost-of-living increases. For 2009, you generally can give a gift valued at up to $13,000 each, to any number of people, and none of the gifts will be taxable. If you are married, both you and your spouse can separately give gifts valued at up to $13,000 to the same person in 2009 without making a taxable gift.

Filing a Gift Tax Return
Generally, you must file a gift tax return on Form 709 if any of the following apply:

• You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
• You and your spouse are splitting a gift.
• You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until sometime in the future.
• You gave your spouse an interest in property that will be ended by some future event.

For more information, visit this site, or better yet, see a great CPA.

Learn more about Ike Devji, JD, and our other contributing bloggers here.
 

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