Tax implications of gifting money

Written by brandi brown
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Tax implications of gifting money
Both property and monetary gifts fall under the IRS' taxable gifting laws. (gift image by Horticulture from Fotolia.com)

Gifting money or property is an area of tax law fraught with myths. Some people believe they can avoid paying taxes on money if they give it as a gift. Others believe no one pays taxes on this money. Still others believe the IRS taxes the same money and property multiple times. The IRS has clear guidelines about gift taxes, who pays them, and what property and money transfers apply.

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Definition

Gifting money means giving someone something, whether money, property or another tangible asset, that the person will use now without an expectation of returning. The person must intend to use the gift now, so parents cannot "gift" a child their home then continue to live in it to exempt the home from estate taxes.

Size Exclusions

A number of exclusions exist based on the size of the gift one receives. According to the IRS, gifts to one individual from another that amount to less than £8,450 a year beginning in 2009 are free from the gift tax. The IRS adjusts this figure annually based on interest rates, but it is always reduced to the nearest £650 increment. Beginning in 2009, a person may gift up to £2.3 million of his estate without the recipient paying gift taxes. This £2.3 million accounts for gifts to any person over the lifetime of the giver, meaning no one pays gift taxes on the first £2.3 million gifted from a single estate.

Split Gifting

Split gifting is the process by which two members of one household give a gift to another without paying a gift tax. Split gifting is a typical way for parents to give more money to their children without paying more in taxes. These gifts are based on individuals, so both parents could gift a child £8,450, making the annual limit exclusion for the gift tax £16,900. If both parents gifted to a child and that child's spouse, the parents could give the younger couple £33,800 in one year and remain under the limit exclusion.

Medical and Educational Gifting

Individuals can pay for the medical and educational expenses of another person as a gift. In these scenarios, all parties should keep receipts that show how the money was spent. IRS regulations require the person receiving the gift to complete Form 709 and return this form with his annual income tax returns. During an audit, IRS agents have the authority to request to see this documentation.

Fair Market Value

According to the IRS, individuals who transfer property must consider this gift based on an actual amount a buyer and seller would settle for in a cash transaction. In this assessment, neither party can be under pressure to buy or sell. Using the fair market value assessment keeps people from undervaluing their property gifts to avoid paying taxes.

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