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Understanding
Gifting & The Gift Tax

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What is Gifting?

 

Gifting is a concept embraced by private groups or consenting adults as individuals and has existed for many years. This private activity does not involve network marketing, multi-level marketing, or a kind of business nor commercial ventures. There are no business transactions, investments and/or securities involved in this activity. There is no business or company name or location and there are no directors, officers, shareholders or principals. Private Individuals simply voluntarily support each other in a team concept which helps change participant’s lives. {Click here for "Is Cash Gifting Legal?"} {Click Here To Know The Gift Tax Rules Or The Rules Of Gifting }

 

The concept of private gifting is based upon the fact that both American and Canadian citizens have the Constitutional right to gift property, cash and other assets, and are subject to the rules and regulations established by the laws. The U.S. gifting rules are found in the IRS Tax Code, Title 26, Sections 2501-2504 and 2511. {Click here for a "Gift Tax" overview}

 

The law states that one or more individuals can give a gift to another individual of up to $14,000 each per calendar year without any tax liability to the receiver of the gift, because any taxes on the gift has already been paid. Per the Law GIFTS, Donations, Pledges, contributions, etc., are not included in the gross income of the recipient. Also, see United States, IRS Publication 950. {Click here for 26 USC 102(a)}

 

Privately, giving gifts to one another has always been an expression of appreciation and kindness, which has been happening for centuries. Governments have allowed and supported its practice by allowing institutions and individuals to share their wealth with families, friends and others. It has always been a means of helping and blessing others on special occasions or when the need arises. [Source: Speed Gifting. 02/14/2016] {Click here to learn more about personal gifting}

 

What is the Gift Tax?

 

A gift tax is levied against an individual when he gives property or financial assets to another person without receiving at least an equal value in return. Not all gifts are subject to the gift tax, however. In fact, gifts with a value less than the IRS annual exclusion, which is $14,000 for the tax year 2015, are not taxable, nor are gifts given to certain organizations:

 

It is up to the donor to know when a gift is subject to the tax, and to file a gift tax return with the IRS. On the gift tax return, the full value of the gift must be listed if the donor received nothing in return. If the donor received partial value for the gift, he will be taxed on the difference. {Click here to know the "Gift Tax" rules}

 

Definition of Gift Tax

 

The gift tax is defined as a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not. The gift tax applies to the transfer by gift of any 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.

 

The Internal Revenue Code defines a gift as a "transfer … in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible." Generally, a gift is any completed transfer of an interest in property to the extent that the donor has not received something of value in return, with the exception of a transfer that results from an ordinary business transaction or the discharge of legal obligations, such as the obligation to support minor children. This definition of gifts does not require the intent to make a gift. An individual may make gifts of both present interests (such as life estates) and future interests (such as remainders) in property (26 U.S.C.A. 2503(b)).

 

From a tax standpoint, gifts have two principal advantages over transfers at death. First, gifts allow a donor to transfer property while its value is low, allowing future appreciation in property value to pass to others free of additional gift or estate tax. Second, provided that the gift is of a present interest in property, a donor may transfer up to $11,000 exempt from tax to each donee every calendar year, which allows the donor to reduce the size of the estate remaining at death without any transfer tax consequences.

 

To constitute a gift, a transfer must satisfy two basic requirements: It must lack consideration, in whole or in part (that is, the recipient must give up nothing in return); and the donor must relinquish all control over the transferred interest. To constitute a tax-exempt gift, a transfer also must constitute a present interest in property. (A present interest is something that a person owns at the present time, whereas a future interest is something that a person will come to own in the future, such as the proceeds of a trust.)

 

Lack of Consideration

 

A transfer is not a gift if the transferor receives consideration, or something of value, in return for it. For example, if A sells B a used car worth $5,000 and receives $5,000 in exchange, the transfer is not a gift because it is supported by "adequate and full consideration" (26 U.S.C.A. 2512(b)). But if A sells B the same car for only $2,000, the transfer constitutes a gift of $3,000 because A exchanges $3,000 worth of car for nothing.

 

Finally, if A gives B the car without receiving anything in return, the transfer constitutes a gift of $5,000. Although consideration may be whole or partial, not all transfers for partial or insufficient consideration result in gifts. An arm's-length sale—that is, a sale free of any special relationship between buyer and seller—will not be considered a gift where no intent to make a gift exists, even if the consideration is not adequate. This limit on the definition of gifts excludes bad business deals and forced sales from gift tax treatment.

 

The Completeness Requirement

 

A transfer constitutes a gift for tax purposes only if the donor has parted with the ability to exercise "dominion and control" over the property transferred. Many transfers of property satisfy this condition. For example, if A takes B out for a birthday dinner, the act of purchasing the dinner is a gift because A cannot regain control over the food that B consumes, or revoke the acts of purchasing and consuming the meal.

 

When the donor has not relinquished absolutely the ability to control or manage the property or its use, however, the "gift" may not be complete for tax purposes. The most common example of an incomplete transfer is a transfer of property to a revocable trust, in which the donor retains the right, as trustee, to alter, amend, or rescind the trust. The gift is not completed because the donor could restore ownership in the trust property to himself or herself, or change his or her mind about who will enjoy or later receive the property.

 

When a taxable gift in the form of cash, stocks, real estate, or other tangible or intangible property is made, the tax is usually imposed on the donor (the giver) unless there is a retention of an interest which delays completion of the gift. A transfer is "completely gratuitous" when the donor receives nothing of value in exchange for the given property. A transfer is "gratuitous in part" when the donor receives some value but the value of the property received by the donor is substantially less than the value of the property given by the donor. In this case, the amount of the gift is the difference.

 

In the United States, the gift tax is governed by Chapter 12, Subtitle B of the Internal Revenue Code. The tax is imposed by section 2501 of the Code. For the purposes of taxable income, courts have defined a "gift" as the proceeds from a "detached and disinterested generosity." Gifts are often given out of "affection, respect, admiration, charity or like impulses." [Source: Free Dictionary. 02/14/2016] {Click here to learn more at the Free Dictionary}

 

Exemptions

 

There are two levels of exemption from the gift tax. First, gifts of up to the annual exclusion ($14,000 per recipient in 2015) incur no tax or filing requirement. By splitting their gifts, married couples can give up to twice this amount tax-free. Note that each giver and recipient pair has their own unique annual exclusion; a giver can give to any number of recipients and the exclusion is not affected by other gifts that recipient may have received from others.

 

Tax Deductibility For Gifts

 

Pursuant to 26 U.S.C.  102(a), property acquired by gift, bequest, devise, or inheritance is not included in gross income and thus a taxpayer does not have to include the value of the property when filing an income tax return. Although many items might appear to be gift, courts have held the most critical factor is the transferor's intent. Bogardus v. Commissioner, 302 U.S. 34, 43, 58 S.Ct. 61, 65, 82 L.Ed. 32. (1937). The transferor must demonstrate a "detached and disinterested generosity" when giving the gift to actually exclude the value of the gift from the taxpayer's gross income. Commissioner of Internal Revenue v. LoBue, 352 U.S. 243, 246, 76 S.Ct. 800, 803, 100 L.Ed. 1142 (1956). Unfortunately, the court's articulation of what exactly satisfies a "detached and disinterested generosity" leaves much to be desired.

 

The treatment of a gift for U.S. gift tax purposes (the transfer tax) should not be confused with the treatment of gifts for other tax purposes. For example, for U.S. income tax purposes, most gifts are excluded (under Internal Revenue Code section 102) from the gross income of the recipient, and thus are not taxed as income. For the purposes of taxable income, courts have defined "gift" as proceeds from a "detached and disinterested generosity." See Commissioner v. Duberstein (quoting Commissioner v. LoBue, 351 U.S. 243 (1956)). [Source: Wikipedia, 02/14/2016] {Click here to read the entire article}

 
How The Gift Tax Works
 
Currently, you can give up to $14,000 each to any number of persons in a single year without incurring a taxable gift ($28,000 for spouses "splitting" gifts). The lucky recipient typically owes no taxes and doesn't have to report the gift unless it comes from a foreign source.However, if your gift exceeds $14,000 to any person during the course of the year, you‘re to report it on a Gift Tax Return (IRS Form 709).
Source: 04/26/2016
 
By: George M. Sistrunk - 4/26/16

Last updated on

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