Gift Tax
The Gift Tax exclusion increases from $11,000 to $12,000 for 2006.
For tax purposes, a gift is a transfer of property for less than its full value. In other words, if you aren't paid back, at least not fully, it's a gift.
In 2006, you can give a lifetime total of $1,000,000 in taxable gifts without paying a gift tax. But many gifts are not taxable, so they do not count as part of that lifetime total.
Here are some gifts that are not considered "taxable gifts," and therefore do not count as part of your $1,000,000 lifetime total. |
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Present-interest gift of $12,000 per recipient per year. Present-interest means that the person receiving the gift has an unrestricted right to use or enjoy the gift immediately. You can give amounts up to $12,000 to each person, gifting as many different people as you want, without triggering the gift tax.
Charitable gifts
Gifts to a spouse who is not a U.S. citizen. Gifts to foreign spouses are subject to an annual limit of $117,000 ($120,000 for 2006), indexed for inflation.
Gifts of educational expenses. To qualify for the unlimited exclusion for qualified education expenses, you must make a direct payment to the educational institution for tuition only. Books, supplies, and living expenses do not qualify. If you want to pay for books, supplies, and living expenses in addition to the unlimited education exclusion, you can make a gift of $12,000 to the student under the annual gift exclusion.
Gifts of medical expenses. Medical payments must be paid directly to the person providing the care in order to qualify for the unlimited exclusion. Qualifying medical expenses include:
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• Diagnosis and treatment of disease
• Procedures affecting a structure or function of the body
• Transportation primarily for medical care
• Medical insurance, including long-term care insurance |
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The following gifts are considered to be taxable gifts (when they exceed the annual gift exclusion amount, which is $12,000 in 2006). Remember: Taxable gifts count as part of the $1,000,000 you are allowed to give away during your lifetime, before you must pay the gift tax.
Checks. The gift of a check is effective on the date the donor gives the check to the recipient. The donor must still be alive when the donor's bank pays the check. (This rule prevents people from making "deathbed gifts" to avoid estate taxes.)
Adding a joint tenant to real estate. This transaction becomes a taxable gift if the new joint tenant has the right under state law to sever his interest in the joint tenancy and receive half of the property. Note that the recipient only needs to have the right to do so for the transaction to be considered a gift.
Loaning $10,000 or more at less than the market rate of interest. The value of the gift is based on the difference between the interest rate charged and the applicable federal rate. Applicable federal rates are revised monthly. This rule does not apply to loans of $10,000 or less.
Canceling indebtedness
Making a payment owed by someone else. This is a gift to the debtor.
Making a gift as an individual to a corporation. Such a donation is considered to be a gift to the individual shareholders of the corporation unless there is a valid business reason for the gift. Such a donation is not a present-interest gift, and thus does not qualify for the $12,000 per person per year exclusion.
Giving real or tangible property located in the U.S. This is subject to the gift tax rules, even if the donor and the recipient are not U.S. citizens or residents. Nonresident aliens who give real or tangible property located in the United States are allowed the $12,000 annual present-interest gift exclusion and unlimited marital deduction to U.S. citizen spouses, but are not allowed the $1,000,000 lifetime gift tax exemption. |
How Gifts Affect Your Tax Basis
Property that you pass along to your heirs gets treated as taxable to your estate based on its fair market value on the date of your death. Your estate pays the taxes out of whatever cash it has, and if it does not have enough cash, property may need to be sold to raise the cash to pay the taxes.
Of course, you may be leaving your beneficiaries a house that you bought for $50,000 and have owned for years and years, but if your heirs can sell it for $500,000, the IRS considers the property worth half a million dollars for purposes of your estate taxes. Your "tax basis" (what you originally paid for the property, plus any money you spent to improve it over the years) is $50,000. If you sell the house yourself, right now, you will have a gain of $450,000 ($500,000 minus $50,000).
Say you do not sell the house and you leave your $500,000 house to your son when you die. He then immediately sells the house. What is his tax basis? $50,000? No; he receives an increase in the tax basis at your death. This increase in value is called a step-up adjustment to the basis (the value on which his sale taxes will be based). So, when he sells the house, he has no gain ($500,000 minus $500,000, his tax basis).
One disadvantage of giving someone property is that the property does not receive a step-up in tax basis as it would if the property were inherited. A gift recipient has two different tax bases; one for property sold at a gain, and one for property sold at a loss.
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If you sell the property for a gain, your tax basis is the donor's tax basis. Whatever the original owner's basis was, that's your basis. |
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If you sell the property at a loss, your basis is the donor's basis or the fair market value of the property; whichever is less at the time of the gift. |
How to Report and Pay the Gift Tax
If you make a taxable gift, you must file Form 709, U.S. Gift Tax Return, which is due April 15 of the following year. Even if you do not owe a gift tax because you have not reached the $1,000,000 limit, you are still required to file this form if you made a gift that does not qualify as excludable.
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What to Keep -- Where to Store -- When to Shred |
| Originals Rarely Needed |
Store In |
Shred After |
Give Copies |
| Adoption Papers |
Bank safe-deposit box |
Never discard |
Executor, lawyer |
| Citizenship Papers |
Bank safe-deposit box |
Never discard |
Executor |
| Divorce Decree |
Bank safe-deposit box |
Never discard |
Lawyer |
| Lawsuits |
Bank safe-deposit box |
Never discard |
Lawyer |
| Household Inventory |
Bank safe-deposit box |
Never discard |
Financial advisor |
| Photos of Possessions |
Bank safe-deposit box |
Never discard |
Financial advisor |
| Military Discharge |
Bank safe-deposit box |
Never discard |
Never discard |
| Veteran's Papers |
Bank safe-deposit box |
Never discard |
Never discard |
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| Originals Sometimes Needed |
Store In |
Shred After |
Give Copies |
| Birth Certificate |
Home fire-resistant safe |
Never discard |
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| Cemetery Deed |
Home fire-resistant safe |
Never discard |
Heir |
| Real Estate Deeds |
Home fire-resistant safe |
10 yrs after
property sold |
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| Death Certificates |
Locked file cabinet |
Never discard |
Executor |
| Diplomas |
Home fire-resistant safe |
Never discard |
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| Guardianship Arrangements |
Home fire-resistant safe |
Never discard |
Executor, guardian |
| Heath Records |
Home fire-resistant safe |
Never discard |
Doctor |
| Immunization Records |
Home fire-resistant safe |
Never discard |
Doctor |
| Marriage Certificates |
Home fire-resistant safe |
Never discard |
Executor |
| Medical Directive |
Home fire-resistant safe |
New one signed |
Doctor, heir |
| Naturalization Certification |
Home fire-resistant safe |
Never discard |
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| Tax Documents |
Store In |
Shred After |
Give Copies |
| Bank Statements |
Locked file cabinet |
7 years |
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| Canceled Checks |
Locked file cabinet |
7 years |
|
| Credit Card Statements |
Locked file cabinet |
7 years |
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| Home Purchase/Improvement |
Locked file cabinet |
7 yrs after home is sold |
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| Tax Returns/Supporting Documents |
Locked file cabinet |
7 yrs after
filing date |
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| Form 8606 |
Locked file cabinet |
7 yrs after
IRA is liquidated |
|
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| Investment Documents |
Store In |
Shred After |
Give Copies |
| Annuity Contracts |
Locked file cabinet |
Annuity paid out |
Financial advisor |
| Loan Agreements |
Locked file cabinet |
10 yrs after
property sold |
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| Pension Plan Documents |
Locked file cabinet |
Never discard |
Financial advisor |
| Real Estate Purchase/Improvements |
Locked file cabinet |
7 yrs after
property sold |
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| Investment Account Statements |
Locked file cabinet |
7 yrs after last investment held
in account is sold |
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