Tag Archives: gift tax

Who pays tax on gifts?

White Gift Box with Red Satin Ribbon BowDear Liza: My brother gave me two checks totaling $200,000 in 2012 as a gift.  Who pays the tax on that? You have a generous brother! And, in the no good deed goes unpunished department,  it is the DONOR of the gift (your brother) who is responsible for reporting the gift and paying the tax due, if any. You, the DONEE, receive the gift free of tax because gifts are not ordinary income under the income tax rules.  In 2012, gifts under $5.12 million dollars are not subject to gift tax, but any gift over $13,000 must be reported on a gift tax return by April, 2013.  Your brother must file that return, which tells the IRS that he made you a gift of $200,000.  Assuming he hasn’t made other gifts that exceed that $5.12 million, though, no tax will be due.  Instead, by reporting the gift, your brother has used up some of his lifetime gift tax credit–the tax that would otherwise be due on a gift of $200,000.

Where the Gift Tax falls

Dear Liza: Currently, I own 1/3 of a condominium. My mom owns 1/3 and and brother owns 1/3.  My mom and brother (both alive) want to change the title to just my name.  Do my mom and brother have to pay gift tax or do I have to pay gift tax?   I read on IRS.gov that $5 million free of gift tax during my lifetime is only for estate tax and 13,000 is gift tax each year. Don’t you have to be dead to receive estate tax? So many good questions here.  I will answer, with this caveat: if Congress makes a deal with the President, some of what I have to say may change. As of RIGHT NOW (December 30th, 2012), the donor of the gift (your mother and your brother) are liable for any gift tax due on the transaction, not the donee (that’s you). But, unless that’s one pricey condo, they’re not likely to actually owe any gift tax at all.
Until tomorrow, each person is allowed to give up to $5.12 million, free of gift tax.  This ‘magic  number’ currently applies to all lifetime gifts, or gifts made at death. That number is scheduled to go down to $1 million on January 1, 2013–but still, what that means is your mother and brother would have to file a gift tax return by April of the year following the gift and report the value of the gift (this will require an appraisal to document that value).  If the value of the gift is less than the available magic number, no tax is actually due (but they’ll have used up some of their lifetime ability to give free of gift or estate tax).
That $13,000 gift is called an ‘annual exclusion gift’ and it can be made entirely free of tax, each year, and as long as no gift to any individual exceeds the annual exclusion, no gifts need to be reported at all. The annual exclusion is scheduled to increase to $14,000 in 2013.
I can’t tell from your question where you live. But in California, where I practice, the gift you describe will also result in a partial reassessment of your property taxes,  so please make sure that you also understand the property tax issues raised by the gift you contemplate.

Buying Mom’s House: Be Careful

Dear Liza,  The only asset funding my Mother’s Trust is her primary residence. However, she recently moved from CA to live with me in WA. My sister would like to purchase the home but doesn’t have the full amount. She would pay a down payment of $150,000 which would assist with my Mother’s caregivers and in-home health care. The balance approx. $150,000-$200,000 would be recorded as a Deed of Trust naming the Trustee of the Trust as the beneficiary.  Would this affect  or invalidate the Trust in any way? I have to give you a sort of lawyerly answer on this one: probably this is just fine, but you should have an attorney take a look at the trust to make sure that your mother, as the grantor of the trust and current trustee of the trust, has the power to sell trust assets and the power to loan trust assets.  A well-drafted trust would certainly permit this, but I’ve seen trusts that aren’t well drafted to be sure. Also, sales of assets between family members should be for fair market value (in other words, your sister should be willing to pay what a third-party buyer would be willing to pay). Otherwise,  your mother would be making a taxable gift to your sister of the difference between that fair market value and the price she actually paid.  Your mother should get the house appraised to document this value before the sale occurs. Finally, the interest rate on the loan must be at least the applicable federal rate (AFR) for loans of that sort in the month the loan is made (this is published monthly by the IRS.) If the loan’s interest is too low, the difference between that rate and the AFR is also considered a taxable gift from your mother to your sister.

Giving away that family cabin

Dear Liza: I am divorced and own a second vacation cabin that I want my children to have when I die.  Is there a way for me to retain rights, ownership and control while I am alive and of sound mind but pass the property to them when I die that doesn’t have a bunch of overwhelming taxes?  Yes.  Upon your death you can leave the kids the cabin either outright or in a trust. If you leave it to them outright, as tenants in common, each will own 1/2 and can leave their half to whomever they choose when they die. If you leave it to them in trust, you can control how it’s managed and how it would be transferred upon their deaths (as in maybe it has to go to their children or be sold to other family members.) The tax treatment of the gift is that it will go to them free of tax — if there’s a tax to pay, it falls on your estate, but they inherit what’s left free of tax.  The capital gains tax basis on the property will be what it is on your date of death, so if they sell it someday, they’ll owe tax on the gain in value from your date of death to the date of sale. I don’t know what state you live in, but in California, where I practice, a gift from parent to children is also excluded from reassessment of property tax, so they get the property tax rate you were paying.

Should I add my son to the title of my house?

Dear Liza: I thought about putting my son on the title of my house so he would have additional financial support. I’m not just real comfortable with that idea. I know creditors can and do go after people with ownership to a home.My son is doing well, but he does have a large student loan he needs to repay. What do you think about my adding him to the title of my house?  I think you should listen to that inner voice that isn’t comfortable with the idea.  You are absolutely right that adding him to the title puts your assets at risk to his creditors.   Also, if you put him on title, you are making a taxable gift to him of one-half the value of the house and you should report that on a gift tax return by April 15th of the following year. (You won’t owe any gift tax, most likely, because at the moment you can give up to $5.12 million without having to pay gift tax, but you still have to report any gift over $13,000.)  Finally, he will get your one-half of the house with a capital gains tax basis of what you paid for that house (and I’m guessing it’s appreciated since then.)  If he ever does sell it, he’ll owe capital gains taxes on the amount it’s appreciated since you purchased it.  You can leave him the house at your death, if that’s what you want to do, but for now, I wouldn’t recommend it.

Lifetime Gifts

Dear Liza: My friend has a stock portfolio she wants to give me before she dies.  She had cancer and only has a few months to live.  She wants to give it to me now to avoid the whole estate thing.  The total is about $220,000.  Do I have to pay gift tax if she transfers the portfolio to me in kind?  I am sorry to hear that your friend is so ill.  She can give you that portfolio, but it might not be the most tax-effective way to do it.  If she gives you the portfolio before she dies, she (or her estate) must report the gift on a gift tax return by April 15th of the following year. She won’t owe any gift tax on the transfer, because in 2012, each of us can give up to $5.12 million dollars free of gift tax, but any gift over the annual gift tax exclusion amount of $13,000 must be reported on that gift tax return.  If you later sell any of that portfolio, though, you will owe capital gains taxes on the difference between your friend’s basis in that stock and the sales price.   For example, if your friend owned stock in Y Corp., that she purchased for $1 dollar a share in 1982, and that stock is worth $100/share in 2013, you will owe capital gains on that $99/share rise in value.  Alternatively, if she gives you that portfolio upon her death, you will inherit it at the current fair market value for capital gains tax purposes.  In other words, if that Y Corp. stock is worth $100/share when your friend dies, and you later sell it at that price, you will owe zero in capital  gains taxes.  That portfolio will, however, be part of her taxable estate at her death, so, depending upon her other assets, her estate may or may not have to pay estate tax on those assets.  (Currently, she can give up to $5.12 million at death free of estate tax.) So, you and your friend should seek the advice of an accountant to see whether it makes sense for your friend to give you that stock via a Will or a trust upon her death, or during her lifetime.

That $5 Million Exemption

Hi Liza,  I read from FAQ on the nolo website, “The $5 million exemption applies to property you give away during life or leave at your death. In other words, you can transfer, either while you are living or at your death, up to $5 million of property tax-free.” So, does it mean that I can pass a $1 million house to my children without any costs? now? If yes, what time is used as the tax basis? Yes, until the current law expires at the end of 2012, you could absolutely give that house to your children free of gift tax. But they would also get YOUR basis in the house for capital gains tax purposes. In other words, if you purchased that house for $25,000 in the 1970′s and now it’s worth $1 million, if you give that house to your kids, and they sell it, they will owe capital gains taxes on all of that gain. If you give them the house only upon your death, their basis in that property would be the fair market value of the property at your death, so all of that gain goes away.  If you make the gift now, also, don’t forget to file a gift tax return by April 15th of the following year.  You are still required to file that return, even though no tax is due.

Annual Giving: The Time is Right

Dear Liza: Does a gift to a living trust (with children and grandchildren – total of 9 beneficiaries) take a total of $13k annual exclusion or is the annual exclusion based on the beneficiaries?  Good question. Before I answer it, a little background for my loyal readers: the annual exclusion is the amount of money you are allowed to give to someone free of gift tax.  As we reach the end of the year, now is a good time to make such gifts, since each year you get a new exclusion to use. These annual gifts are in addition to the amount of money you are also allowed to give away free of gift tax over your lifetime (currently $5 million).  By skillfull use of the annual exclusion, you can transfer a lot of money to those you love without ever having to use up that lifetime exclusion–it’s a great idea, if you can afford it.

You are allowed to give $13,000 free of gift tax to EACH recipient each year. So, one person could, if they wanted to, give each person in their city $13,000 (or less) without having to report any of the gifts. However, if any one gift is more than $13,000, all of the gifts would have to be reported on a gift tax return by April 15th of the following year. And, a gift has to be a completed gift to count–a gift to a living trust is not a completed gift (because the donor could always revoke the trust at a future point).  That’s why, if a person wants to make annual gifts to children and grandchildren in trust, that trust has to irrevocable and has to be what’s called a “Crummey Trust”–which means that each beneficiary has a certain amount of time to withdraw that annual gift after it is made. If they don’t (and, of course, they don’t), the money stays in trust and the donor gets to use that annual exclusion from gift tax for each trust beneficiary.

Gifts v. Loans from Mom

Dear Liza: I want to buy a home in Arizona and my Mom wants to loan me the 40k for my 20% down. It’s from her savings account. My broker said she should do a letter saying she is “gifting” it to me.  She lives in California. Will this cause her any issues with the IRS? can she loan it instead? Your Mom can give you the money or loan you the money, it’s up to her.  If she gives you the money, she will need to file a gift tax return next year.  But, she won’t owe any gift tax because each person is currently allowed to give (I kid you not!) five million dollars, free of gift tax.  Her 40K gift to you will mean that she only has $4,960,000 left of her lifetime gifting credit. This shouldn’t cause her major trouble, right? If, instead, she’d rather make a loan to you, she can do so. But the loan should be in writing, the interest rate must be at least equal to the published federal rate (AFR) for that month, and the loan should be secured by the property. Here’s a good article on family loans that you might find helpful.

Do I Have To Report A Gift to the IRS?

Dear Liza, My Dad recently gave me a gift of $13,000. Do I have to report this on my income tax return next year? Nope. Gifts are not considered ordinary income under the US tax code. So, you don’t have to report the gift. If there’s any tax to be paid, it is paid by the gift-giver (in tax-speak, the ‘donor’), not by the recipient (in tax-speak, the ‘donee’). However, your very nice Dad just gave you the maximum amount that he can give to any one individual each year without having to report the gift (in tax speak, this is an ‘annual exclusion gift’), so you are both completely within the law, and the transaction is entirely tax-free. Nicely done!