Gifts and your taxes: What you need to know
Tax time is upon us. In fact, the deadline to file taxes is less than a week away. And while you may have already forgotten about that awful gift you got for Christmas, as you prepare your taxes, you’re going to have to recall other gifts you may have bestowed or received throughout the year—stocks, bonds, real estate, and cash.
Whether you’re the giver or the receiver, the IRS wants to know when gifts are made to 1) tax them and/or 2) tally how much of the giver’s lifetime gift and estate tax exclusion he or she has used. That’s right, there’s a limit to your and others’ graciousness as a tax benefit. Granted, it’s a pretty big limit. In 2012, the lifetime exclusion was $5.12 million, and in January 2013, it was bumped up to $5.25 million, adjusting for inflation.
So before you begin filing your taxes, see if any of these rules apply to you:
1. Did you receive a gift?
You’re not taxed on the gift or required to report to the IRS the year you receive it. However, you’ll be taxed when the asset gifted is sold and sold for a profit. The profit is typically capital gain. Since it’ll be your responsibility to report the sale of the gifted asset, it’s important for those who make gifts to provide information necessary for the recipient to calculate the profit on the sale. It’s also important to keep the documentation that supports what the donor paid for it, since the person who receives the gift will have to document the sale basis if they’re audited.
2. Did you give a gift?
If you give a gift, you must report your 2012 gifts in excess of $13,000 per year per person. In 2013, that gift exclusion rises to $14,000. When reporting gifts, the cost basis (usually what you paid for the asset gifted) and the fair market value of the gift must be reported. If you give real estate, typically a real estate appraisal on the date of the gift will be necessary. The real estate appraisal will usually be required to be attached to the gift tax return.
3. Who needs to report?
As you can see, gift reporting to the IRS is for individuals who give another person more than $13,000 per year. Couples were able to jointly give up to $26,000 in 2012 and will be able to give up to $28,000 in 2013 without impacting their once-in-a-lifetime exclusion. Joint gifts require spousal consent and thus require the filing of a gift tax return even when below the filing limit.
4. What counts as a gift?
Gifts considered for the yearly amount can accumulate during the year, so it may be necessary to track gifts to individuals throughout the year. For example, if you gave your daughter a $500 birthday gift, a $1,000 graduation gift, and $12,500 of yearly college living expenses, that takes the yearly total of gifts to above the yearly $13,000 threshold and requires you to report.
5. When is this really important?
Gifting is typically part of estate planning, usually with the help of a qualified attorney and tax planner. Estate planning is not just for the wealthy. Estate planning encompasses wills and testaments, trusts, and retirement, disability, and life insurance. You not only address how to leave assets to others, but also answer such important questions as “Who will manage your affairs if you pass away?” and “Who will look after your children if you’re not able?” Without a will, a court typically decides.
The gift rules and limits explained above are based on federal rules. Each state has its own rules as well. Consult a knowledgeable lawyer or accountant before making important financial decisions.