Estate Planning

How does the Internal Revenue Service view gifts?  

2007 Edition

The IRS requires that certain gifts be reported to the IRS using a gift tax form (IRS form 709).  The gifts that must be reported to the IRS, must be reported on the form by April 15th of the following year (the year after the gift is made).  There are certain gifts that are exempt, and thus need not be reported to the IRS (such as gifts to a U.S.-citizen spouse). 

The following gifts are exempt and need not be reported to the IRS:

(a)  gifts to a U.S.-citizen spouse

Example:  Bill Gates gives his wife a check for $2 million.

(b)  gifts to charities recognized by the U.S. government

Example:  Bob gives a $15,000 check to The Salvation Army.

Example:  Jan gives $20,000 of IBM stock to The Red Cross.

**  However, the giver would want to report the gift in order to take a tax deduction on his/her income tax return (but it is not required to report the gift as long as you don’t ask for the tax deduction). 

(c)  the first $12,000 you give someone (who isn’t your spouse) in a calendar year doesn’t have to be reported to the IRS (this is called the “annual exclusion amount”. (It used to be $11,000 until January 2006 when it increased to $12,000.)

          Example:  Father gives daughter Beth a $3,000 check for spending money while Beth is at college.

          Example:  Mother gives son Tom $5,000 worth of ABC stock.   

          (d)  gifts when the giver directly pays for another person’s medical bills (when the giver directly pays the doctor, clinic, or hospital).  {This is called the medical exclusion.}

          Example:  Grandpa directly pays Good Care Hospital $128,000 for grandson John to have an operation.

          Example:  Mother directly pays Dandy Doctors Clinic $1,600 for son Ken to have receive treatment for his back pains.

 (e)  gifts when the giver directly pays for another person’s tuition to a college, university, vocational institution, or private school.  {This  is called the educational exclusion.}

Example:  Grandma directly pays The University of Illinois for granddaughter Jill’s tuition. 

Example:  Father directly pays The Edison Institute of Technology for daughter Nancy’s tuition. 

(f)  gifts to a political organization for its use.

Example:  Larry gives $4,000 to the Democratic National Party. 

** If the gift is over the annual exclusion amount (presently $12,000 in a calendar year), unless one of the exceptions applies, such as for medical expenses or educational expenses paid directly by the giver, then the giver will have a reduction in what he or she can pass free of federal estate taxes (inheritance taxes) at his/her death. 

For example, if Al gives son Ed $32,000 in the year 2006, then Al reports this gift to the IRS on a gift tax form by April 15th of the following year (2007).  This will mean that in the year that Al dies, Al will be able to give $20,000 less than he otherwise would have been able to give free of federal estate taxes {$32,000 minus $12,000 equals $20,000}.  If Al dies in the year 2006, federal law in 2006 allows Al to pass (a) an unlimited amount of assets to his U.S.-citizen spouse, (b) an unlimited amount of assets to charities recognized by the US government, and (c) $2 million {this number can vary from one year to the next} in total to other persons {such as Al’s children, grandchildren, brothers, sisters, nieces, nephews, cousins, friends, etc.). 

How can I get further information from the IRS about gift taxes?

     You can call the IRS at 1-800-829-3676 and request a copy of Publication 950 “Introduction to Estate and Gift Taxes” (8 pages long)

     Check out the IRS’s web site:  www.irs.ustreas.gov (and you can read or print out Publication 950)

 

Examples:

Number 1: 

a)  Al gives son Ed $32,000 in the year 2006.

b)  Al reports this gift to the IRS on a gift tax form by April 15th of the following year (2007).  {This is not taxable income to son Ed.}

c)  By giving $32,000 to son Ed in 2006, this means that in the year that Al dies, Al will be able to give $20,000 less than Al otherwise would have been able to give free of federal estate taxes {$32,000 minus $12,000 equals $20,000}. 

d)  If Al were to die in 2007 this would be the amount Al could give free of estate tax (inheritance tax):

                      $2 million (amount for 2007)

minus   $20,000 (amount over $12,000 gifted to son Ed in the year 2006)

equals  $1,980,000 can be passed free of estate tax if Al dies in 2007

Number 2: 

a)  Joe gives daughter Pam $52,000 in the year 2006.

b)  Joe reports this gift to the IRS on a gift tax form by April 15th of the following year (2007).  {This is not taxable income to daughter Pam.}

c)  By giving $52,000 to daughter Pam in 2006, this means that in the year that Joe dies, Joe will be able to give $40,000 less than he otherwise would have been able to give free of federal estate taxes {$52,000 minus $12,000 equals $40,000}. 

d)  If Joe were to die in 2007, this would be the amount Joe could give free of estate tax (inheritance tax):

              $2 million (amount for 2007)

 minus   $40,000 (amount over $12,000 gifted to daughter Pam in the year 2006)

 equals  $1,960,000 can be passed free of estate tax if Joe dies in 2007