Are Strings Attached to that Purse? How to Know if a Gift is Taxable (or Reportable!)

Jean McDevitt, Tax Principal
March 2016

If you transfer money or property to someone as a gift, you may have to report it on a gift tax return. Although the unified gift and estate tax exemption amount has increased significantly in recent years – $5.43 million for 2015 and $5.45 million for 2016 – some gifts still result in a gift tax liability. For others, it’s simply a matter of accurately reporting the transfer on a timely filed gift tax return.

Below are some tips to help you determine the consequences of gifts.

  1. Most gifts are not reportable on a gift tax return. For example, outright transfers to your spouse and certain gifts to qualified charitable organizations generally are not subject to reporting.
  2. Outright gifts, if below the annual exclusion amount for the year, are not required to be reported. For 2015 and 2016, the annual exclusion amount is $14,000. There are occasions when it makes sense to report gifts even if below the annual exclusion threshold. For more on that please see Should I Document Gifts that are Below the Annual Gift Tax Exclusion Amount?
  3. Some transfers are not considered gifts under the tax code at all and thus are not reportable.  These are:
    1. Transfers to political organizations for the organization’s use.
    2. Payments qualifying for the education exclusion, which includes tuition you pay directly to a qualifying educational institution on someone else’s behalf.
    3. Payments qualifying for the medical exclusion, which includes payments you made on someone else’s behalf if paid directly to the medical care provider or medical insurance carrier for healthcare premiums.
  4. Personal gifts do not ordinarily affect your federal income tax. Unlike gifts to qualified tax-exempt organizations, gifts to family and friends cannot be deducted as charitable contributions for tax deduction purposes.
  5. The donor, rather than the donee, bears any potential reporting and tax payment requirements related to a gift. The gift donee:
    1. Does not pay gift tax,
    2. Does not pay income tax, and
    3. Does not have to report the gift on any tax filings.
  6. A gift of property may have income tax consequences to the donee in the future, however. For example, if you gift stock and the donee later sells the shares, the donee (who is assigned the same “cost basis” in the stock that you had at the time of the gift) will realize capital gain on the difference between the selling price and your original basis.
  7. In a calendar year, you and your spouse may gift up to two times the annual exclusion amount ($28,000 for 2015 and 2016) without creating a taxable gift. This “gift splitting” technique may require that you file a gift tax return but it will not reduce your unified gift and estate tax exemption amount.
  8. Gift tax returns must be filed in a number of situations including:
    1. You gifted more than the annual exclusion amount to at least one person (other than outright gifts to your spouse).
    2. You and your spouse want to split a gift to a third party.
    3. You made a gift to charity but it was a partial interest in property, meaning you retained some interest in the property or you transferred part of the interest to a third party.
    4. You gave someone a “future interest” in property, meaning you’ve put certain limitations on their ability to fully enjoy the property now.
    5. You transferred property for your spouse’s benefit but your spouse’s interest will terminate upon the happening of a future event.
  9. Transfers in trust may give rise to a number of reporting requirements and elections. Professional tax advice is essential in all instances when you create, fund, or otherwise add money or property to a trust.
  10. Special rules apply when parties to a gift are not US citizens or US residents. Please seek professional tax advice in those situations as well.

For more information, please contact Jean McDevitt or your regular BNN advisor, at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.