ESTATE PLANNING & TAXES - Look a Gift Horse in the Mouth Lately?
By: Kevin F. Danyi, JD, LLM | Click to read full article
WARNING: Failure to Plan is Hazardous to Your Wealth
One of the most common errors that I see in my estate and trust practice is the failure to file U.S. gift tax returns. Many people make substantial gifts and do so blithely unaware of the federal government’s reporting requirements. Not all attorneys and financial advisers are aware of these basic rules either. Here are just a few things to keep in mind:
What is a gift? It can be a horse or almost any other kind of property. You have made a gift when you voluntarily transfer property to another person without receiving full value or money’s worth. There are many nuances to this in the law. For example, if someone owed you money and you forgive the debt, you have made a gift.
Who has to report a gift? The donor is responsible for filing the return on IRS Form 709, due on April 15th of the year following the gift. The donor is also responsible for paying the tax, if any. Thus, if you are the recipient of the gift, you really don’t have to look that gift horse in the mouth, at least for tax purposes.
You do not have to report gifts under $12,000 in 2007 as long as those gifts are a “present interest” such as cash. Congress exempted this amount every year in order to avoid having wedding gifts, birthday presents and other such things subjected to IRS reporting requirements.
Do I have to pay a tax? Every American is presently allowed a $1 million lifetime exemption equivalent. In other words, you can give away $1 million without having to pay any gift tax.
How much is the gift tax? In 2007 the tax rate is 45%. This high tax rate is the same as the estate tax rate and it is almost certainly worth avoiding if possible.
Here is a typical situation: Mother decides that she wants to transfer her house to Son and Daughter. Mother signs a new deed for $1.00 to her kids and records the deed at the courthouse. Mother has just made a taxable gift of 50% of the fair market value of the property to each child.
If Mother has a net worth of $500,000 and gifts her $300,000 rancher, this transaction should pose no problem, although Mother is still required to file a Form 709 to report it.
It’s a different story if Mother just transferred her $2 million house on St. Thomas. She must file a return to report the gift and must pay applicable gift taxes.
What happens if you don’t file? Donors are required by federal law to file gift tax returns even if there is no tax due. A donor who fails to pay the tax is liable for substantial penalties, interest, and personal liability. Compliance with federal tax law is almost always a good idea! See your tax attorney or CPA for more information.
Kevin F. Danyi, JD, LLM is a tax attorney in Bethlehem, Pennsylvania. His website can be found at www.estatesandtrusts.net
