What Does That Gift Really Cost

As we approach the gift giving season, let’s talk about giving gifts and the gift tax.

The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return – a gift. So, what is considered a gift? According to the IRS web site, any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return. The tax applies whether or not the donor intended for the transfer to be a gift or not.

Again, the gift tax applies to the transfer by gift of any property. Consider this, 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. Additionally, 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. Contact your tax preparer for further information.

The donor is generally responsible for paying the tax for the gift, however in some situations the receiver of the gift may agree to pay the tax.

Fair Market Value

The gift tax is based on the fair market value of the gift. Fair market value is defined as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value is not to be determined by a forced sale price or by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.

If you sell the property your value for the property will be the same as that for the person who gave the gift. For example, if you were given stock that the donor had purchased for $10 per share (and that was his/her basis), and you later sold it for $100 per share, you would pay income tax on a gain of $90 per share. The rules are different for property acquired from an estate. Again please contact your tax prepare for further information.

What is Excluded from the Gift Tax

So you may ask, “Can my gift to my spouse be excluded from the tax?” In general any gift is a taxable gift. However, there are exceptions to this rule. Generally, the following gifts are not taxable gifts.

· Gifts that are not more than the annual exclusion for the calendar year.

· Tuition or medical expenses you pay for someone (the educational and medical exclusions).

· Gifts to your spouse.

· Gifts to a political organization for its use.

In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.

The annual exclusion applies to gifts to each entity. In other words, if you give each of your two children $13,000 the annual exclusion applies to both gifts. If married, both you and your spouse are entitled to the annual exclusion amount. In other words, you have an annual exclusion amount of $13,000 for each gift and she does as well for a total of $26,000 between the two of you for each entity you are giving a gift to.

The gift giving season is here. Be more aware of how your gift may affect the taxes you are paying. There is an annual exclusion amount of $13,000 which is available to both you and your spouse for gifts you give in 2010. And like any other tax rules there are exceptions. Contact a competent tax preparer for further information.

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