Understanding the Gift Tax
If you gave someone gifts valued at more than $14,000:
- You must report the total amount of gifts to the IRS.
- You might have to pay tax on the gifts.
If you or your spouse make a gift to a third party, you can consider it as coming half from you and half from your spouse. This is known as gift splitting. Gift splitting allows you and your spouse to each claim the exclusion, so you can double the exclusion.
The person who receives your gift doesn’t have to report it to the IRS or pay gift or income tax on its value.
Wondering what is the tax on a gift and what counts as a gift? Gifts include money and property, including the use of property. Gifts are given without expecting to receive something of equal value in return. You might be making a gift if:
- You sell something for less than its value.
- You make an interest-free or reduced-interest loan.
There are some exceptions to the tax rules on gifts. These gifts don’t count against the annual limit:
- Tuition or medical expenses you pay directly to an educational or medical institution for someone’s benefit
- Gifts to your spouse
- Gifts to a political organization
- Charitable donations
The money and property you own when you die is known as your estate. It might be subject to federal estate tax. If the estate is worth more than the exclusion amount, it’s usually taxable.
For 2015, most relatively simple estates don’t need to file an estate return (Form 706). This is true if the total value of the estate is less than $5.43 million.
In 2010 only, the executor could have used modified carryover basis rules. This is opposed to the step-up basis rules. Modified carryover basis let the estate avoid paying estate taxes. This was true even if the value of the estate was more than $5 million.
Relatively simple estates include:
- Publicly traded securities
- Small amounts of easily valued assets
- Those with no special deductions or elections
- Property not jointly held
Reduced tax on appreciated securities
If you gave your child appreciated securities, the tax bill on the increase in value is passed on to the child, as well. Appreciated securities include things like stock and mutual fund shares.
Ex: Stock you bought for $2,500 is now worth $5,000. If you sold the stock, you’d owe tax on the $2,500 gain. Since the maximum rate on long-term capital gains is 23.8%, it could cost you up to $595.
If you gave the shares to your child, the same $2,500 would be taxed, but at your child’s rate. Your child’s income might be low enough to allow his or her long-term gains to be taxed at the 0% long-term capital gains rate. So, you eliminate the tax bill.
To learn more, see these tax tips:
- Charitable Donations
- Year-End Tax Tips
Form 709 is the IRS tax form that’s required in certain gift giving situations. Let the experts at H&R Block help you determine when Form 709 should be filed.
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