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The following is intended for reference and is not intended as legal advice for any specific person. If you have legal issues relevant to the discussion below you should speak with a qualified CPA or lawyer and not rely exclusively on what is written below. The information on this website may or may not have been updated since it was written and tax law changes quickly and unpredictably.

Gift Taxes

Note that Wikipedia has a really good article on this subject.

Gifts not income

Gift givers file form 709. Due date is April 15, same as regular return. If you want to file your 1040 and 709 late, you can file the 4868 for both returns, not necessary to fill out the gift tax extension request separately. Rule is the same regarding taxes owed—must be paid up front despite extension. Form 709s should be kept forever. When the person dies, file Form 706, estate tax return—which will reference all previous 709s. Don’t have to fill out form 709 for every gift (e.g. if gift is less than individual annual exclusion, currently $13,000). Form 709 goes to Cincinnati, Ohio.

There is no Michigan gift tax, and no estate tax.

Gifts are not income. §102 IRC “Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.” But income from a gift is taxable “income” for recipient (for example, if a person gives a rental property to his son, the rental income is taxable “income” for the son). You cannot avoid this by gifting the income without gifting the property.

There are gifts that are excluded from gift taxes. The popularly listed four categories are: (1) gifts under the exclusion amount (currently $13,000), (2) gifts to pay tuition (may be deductible also if the donee is taxpayer, his/her spouse, or his/her dependent) (also to pay medical expenses (also sometimes deductible for TP, TP spouse, TP dependents), (3) gifts to spouse (however gifts to a non-US-citizen are explicitly not included in this exception §2523 (i)). However the $10,000 exclusion is raised to $100,000 for gifts to a non-citizen spouse (adjusted for cost of living increases—currently about $134,000). (4) gifts to political organizations (but this also includes gifts to various kinds of charities).

There is a tax on gifts, paid by the donor (§2502(c)). (Currently 35% at maximum rate) irs site.

The gift tax law does not apply to gifts from nonresident non-citizen individuals unless the gift is of US property (which includes stock of a domestic corporation or debt obligations of US persons or of US governments (federal state or local or DC). §2511(a). Gifts of trusts are gifts under the IRS code. §2511(c) unless wholly owned by donor or donor’s spouse.

Estate taxes (dubbed death taxes by Republicans) were cancelled in 2010 under EGTRRA but returned into force as of 1/1/11. Estate taxes are in §2001 of IR Code.

Gift taxes are in §2501. (Amounts and schedule listed in §2502). The amount of gift taxes is graduated from 18% to (rate will be between 31.16% and 35%, approaching 35% as gift becomes larger). (max rate for gifts up to 10,000 is 18%, max rate for gifts over $500K is $155,800K plus 35% of excess over $500K.

There is a credit for foreign gift tax paid §2501 (3)(B).

There are exclusions on some gifts. The current exclusion is $13,000 per annual gift (basis of this in the code is $10,000 (written in ’98) and adjusted upwards in $1,000 increments based on cost of living increases—currently $13,000). However, a husband and wife can combine their exclusions and give $26,000 total per recipient. So a husband and wife with three children can give $26,000 to each child per year, remaining within the exclusion.

A donor does not need to file a Form 709 Gift Return (due same time as regular return, o/a 4/15) provided the donation is less than $13,000, however if a donor combines his exclusion with his wife’s then he does need to file the Form 709.

Even if the amount of the gift is over the $13,000 or $26,000 exclusion, the donor is unlikely to have to pay gift tax on a gift unless he has used up his unified credit, currently $5 million.

You can’t deduct gifts on your income tax return—usually your gifts don’t affect your income tax return.

Foreign gifts:

There is no tax for foreign gifts. Recipients of foreign gift taxes have to file form 3520. Severe penalties for failing to file or for falsifying. Gifts over $100,000 must be reported on the form. Gifts over about $13,000 from foreign partnerships or corporations must be reported on the form. The penalty for failing to file is 5% of gift per month recipient failed to report (a/o 2008). Form 3520 goes to Ogden, Utah.

Comparative:

Canada has no gift or estate tax.

Mexico has gift taxes for certain gifts involving real estate, payable by the recipient. However gifts between spouses and direct family members are not taxable.

Estate Tax

Estate Tax return is usually due 9 months after date of death. You can apply for a six month extension, which is automatically given.

Include this with return:

  1. Copies of the death certificate
  2. Copies of the decedent’s will and/or relevant trusts
  3. Copies of appraisals
  4. Copies of relevant documents regarding litigation involving the estate
  5. Documentation of any unusual items shown on the return (partially included assets, losses, near date of death transfers, others).

You should receive an estate tax closing letter about 6 months after that. If the gov’t decides to look more closely then it takes longer. (http://www.irs.gov/businesses/small/article/0,,id=108143,00.html)

If a person inherits property after the death of decedent, the basis is reset to FMV at time of death IRC §1014 (so an immediate sale may be the best solution).

Penalty for failure to file Form 709.  (Misdemeanor, possible felony) (Financial penalties) (http://www.ehow.com/list_7279142_penalties-file-gift-tax-return.html)

Authority to impose penalties for gift taxes (was IRC 6716, repealed) now possibly 6651 (a) , although 6651(a) specifically refers to other tax forms, not including 709 and 706.