Although the end of 2013 is rapidly approaching, there is still time to gift before the end of the year therefore now is a great time to investigate the merits of gifting. According to the Internal Revenue Service (IRS) a gift is any transfer of assets whether monetary or physical goods to an individual where full consideration is not received in return. In other words, a gift is a transfer of assets where the donor is not compensated in some manner. The IRS considers any gift to be a taxable gift but there are exceptions to this rule.
The four exclusions to the gift tax are:
- Gifts that do not exceed the annual exclusion; $14,000 for 2013 and 2014
- Tuition or medical expenses you pay for someone
- Gifts to your spouse
- Gifts to a political organization for its use
Giving a gift does not usually affect your federal income tax as long as one of the four above exclusions is met, but if not; the donor is typically responsible for paying the gift tax not the recipient. Currently, there is no limit on the number of gifts you may give but remember the annual exclusions apply to each recipient. If you have the desire theoretically you could give unlimited monetary or physical gifts as long as each gift is not greater than $14,000 (for 2013 or 2014).
If you are married, both you and your spouse may gift the same individual thereby doubling the gift without incurring the gift tax. For example, in 2013 and 2014 each spouse may gift $14,000 to the same individual for a total of $28,000.
If you desire to gift property or an asset which is not monetary, there is additional documentation required. Depending upon what the gift is you might need a copy of an appraisal, copies of relevant documents regarding the transfer or gift of the asset or documentation of any unusual items you show on your return. These might include partially-gifted assets or property consisting of land or other physical property.
To determine the value of an asset which consists of physical property, the “Fair Market Value” of the asset is used. Fair Market Value is defined as the price the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. In more simplified terminology, the price the seller would receive if he or she sold the asset.
Many individuals would prefer to start gifting to their heirs during their lifetime so the recipient may enjoy the gift when he or she might need it rather than waiting until the asset becomes part of an estate. As long as the gift meets one of the exclusions there will be no tax ramifications for the individual giving the asset or for the individual receiving the asset. An additional benefit to gifting is the donor will have the pleasure of seeing the recipient use and enjoy the gift.
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