One way to avoid taxable gifts!

If you make a gift (property or money) to a relative in an amount over $14 000 for the year, the gift is taxable. The donor is generally responsible for reporting the gift and possibly having a taxable gift.

The general rule is that any gift is a taxable gift. 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.

However, gifts that are less than the annual exclusion to a  donee for the calendar year ($14 000 in 2016) are not. Gift to a spouse is generally not taxable (except to non citizen spouse over the $147 000 annual exclusion).

What if a grandfather wishes to help his grandchild who is going to college? (or to anybody for that matter as this exclusion is allowed without regard to the relationship between the donor and the donee.)

One of the best way to avoid taxable gift is for him to pay directly the school. If he writes the tuition check directly to the qualified educational organization, this is not a taxable gift. If he writes a check (over the exclusion amount) to his grandchild, then it is. Note that educational exclusion is not allowed for books, supplies, room and board or other similar expenses.

Same exclusion applies to medical expenses when paid directly to the care provider and not reimbursed by the donee’s insurance. Qualified medical expenses not only include doctors and hospitals but also health insurance premiums.Medical cure includes expenses incurred for the diagnosis, cure, treatment or prevention of decease, or for the purpose of affecting any structure or function of the body, or for transportation primarily for and essential to medical care.

Note that if you and your spouse want to give away property that you own together, you are each entitled to the annual exclusion, you therefore can give together up to $28 000 to each donee.

Note also that if you give the use of (or income from) your property, without expecting to receive something at least of equal value in return or 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.

I mentioned at the beginning of this article that the donor might have to pay the gift tax. However, he is allowed a lifetime GST exemption. The amount of the exemption for 2016 is $5,450,000. The gift tax return, form 709, is for you and the IRS to keep track of the amount of lifetime exemption you have used. If you give a child $100,000 to purchase a house, you file a Gift Tax Return showing that gift.  The taxable portion of the gift is $86,000 – but you don’t pay taxes on that amount, because you haven’t used up your lifetime exclusion.

Note that certain gifts, called future interests, are not subject to the annual exclusion of $14 000. A gift is considered a future interest if the donee’s rights to the use, possession, and enjoyment of the property or income from the property will not begin until some future date.

I created this blog to help understand certain basic aspects of U.S. tax law. Of course, each situation is unique and nothing that is on this site will ever replace the expert advice of a tax professional.

Please do not hesitate to contact me should you have any question