Taxes on Gifts

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Dec 202011
 

Transferring of certain property to some relative, friend or even an employee is connoted to be a gift. There are several cases where people undertake such transfers in order to plan their finances or secure the well-being of some of their relatives. The transfers are subject to certain taxes on gifts, which are governed and implemented by Chapter 12, Subtitle B of the Internal Revenue Code. There are some simple rules with the help of which the tax implications of the gifts can be ascertained.

Tax on Gifts

Federal taxes on gifts is a direct tax and the tax liability or tax debt are payable by the transferee, plus gift based upon the nature of transfer can, or cannot, become an income for the transferee. A ‘Gift’ is basically, any property or money or money’s, tangible or intangible asset that is transferred by an individual to another individual without the exchange of any consideration. This principally does not make it a transaction, it is just a transfer of right of ownership from the donor to the transferee. So the obvious question is what is the logic of paying taxes on gifts. The obvious answer is that the government does not want you to gift away you money or assets of any kind to reduce your overall tax liability. While filing a common income tax, certain gifts, donation and transfers of property are deductible from the total income. The gift tax imposed by the IRS prohibits, or rather discourages, tax payers from exploiting these deductions. The second root of the tax is that it also prevents the evasion of estate tax. Thirdly, it prevents people from conducting illegal and unethical activities.

Taxes on Gifts: Mechanism and Working

As mentioned above, there no taxes on gifts received, however the person who has gifted amount has to worry about the tax implications. Thus, as an individual you also do not have to worry about any issues such as taxes on wedding gifts. There are however certain terms and conditions for even these amounts. In the year 2010 the taxes on gifts were revised, and are to be phased out after 2012. The arrangement is connoted to be a temporary one. The basic mechanism of gift tax is a bit different. Here is how it works:

The lifetime exclusion or tax deduction from the gift tax is $1,000,000.
The annual exception limit is $13,000, if gifted individually, and $26,000 if jointly gifted along with spouse.
Anything that exceeds the $13,000 sum or $26,000, is to be reported in the gift tax return ,which is known as Form 709: U. S. Gift (and Generation-Skipping Transfer) Tax Return, filing limit April 15. In such instances the amount that exceeds the annually prescribed limit does not become taxable.
Throughout your life you may giving several gifts in form of cash or worth of cash, with or without exceeding any of the limits. Whatever exceeds $13,000 or $26,000 keeps totaling up year after year and the moment this accumulated amount exceeds the lifetime limit of $1,000,000, you are legally obliged to file the Form 709 and also pay 35% of the gift as taxes on monetary gifts that exclude $1,000,000.

As of 2011, the basic lifetime exclusion has been raised to $5 million. One twist to this tax is that your executor also becomes liable to pay it along with the common estate taxes. It also means that initial $5 million of your estate after your demise would not be taxed as estate and inheritance tax, which makes things a little easier.

Just like in case of income tax there are certain deductions, i.e. there are certain gifts that are not taxed, this includes, all the initial deductible gifts (the ones under $13,000 / $26,000), charitable gifts, gifts to spouse under $134,000 per annum, and lastly, the gifts for educational expenses. Taxes on gifts to children, minor, in an outright manner, or through Uniform Gifts to Minors Act, and are under $13,000, are totally exempt.

In the aforementioned information please take into consideration, the $13,000 limit is applicable per gift, and there can be multiple such gifts. The rules that have been stated are as per the current date the Internal Revenue Service (IRS) guidelines and are subject to change. Also note that the taxes on gifts from parents, or taxes on gifts from employer, have same implications, and the relation between the donor and transferee does not affect the limits, implications or even the rules. For further doubts and queries please have a look at the IRS website or the guidelines that accompany your tax forms. Best of all, in case of large tax liabilities probable tax liabilities, get the advise of a tax attorney.

 Posted by at 9:07 am  Tagged with:

Annual Gift Tax Exclusion

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Dec 152011
 

The government levies taxes on gifts if the amount exceeds a certain limit in a year. The limit up to which the gifts are non-taxable is known as annual gift tax exclusion. Before we go ahead and discuss annual gift tax exclusion, it is important to understand what is a gift tax and how it works. Many people in US give away gifts to their friends and relatives every year and mistakenly expect that the government would give them tax deductions as they are displaying exemplary generosity in these cash stricken times! That, unfortunately, is not the case and to tell you the fact, it works the other way round! That is if you give away too many gifts, the government might also ask for its share.

Anytime you gift property, money, art, jewelry, etc., without expecting something of equal value in return, you are liable to be taxed by the government. So, if you sold your country house to one of your old pals and charged him lesser than the fair market value of the property, it would be considered as a gift. According to the Internal Revenue Service (IRS), every time you give away gifts whose combined value is over thirteen thousand dollars, you are to report and pay the tax on your own before Uncle Sam finds out! It can be done by filling the Form 709: United States Gift Tax Return. You can get all information regarding this from IRS official website.

Annual Gift Tax Exclusion – 2011

The annual gift tax exclusion amount for 2011 has remained unchanged and it is same as that of previous year. Let us take a look.

You can legally gift someone up to $13,000, if you file as a single. This applies to each gift that you give away, that is, if you have five friends, you can gift each of them up to 13,000 every year without being taxed.
In case of a husband and a wife, you can combine the gift amount, that is you as a couple can give away gifts up to $26, 000 to each individual.

Lifetime Gift Tax Exclusion

Many people confuse the annual gift tax exclusion for lifetime gift tax exclusion. Lifetime gift tax exclusion is the amount up to which the gifts that exceed the annual limit remain non-taxable over a person’s lifetime. The lifetime gift tax exclusion was revised from $1 million to $5 million this year. According to the IRS, one can give away gifts up to $5 million that exceed the annual gift tax limit over your lifetime without getting taxed. Let us illustrate it with the help of an example.

Suppose you gifted $20,000 to ten of your friends in 2010. As mentioned before the annual gift tax exclusion is $13, 000, which means you have gifted $7000 extra to each of your friends. If we calculate, for ten friends the amount would be $7000×10 = $70,000. So, you will end up spending $70,000 of your $5 million lifetime gift tax exemption.

Exceptions to the Annual Gift Tax

Some of the exceptions to the annual exclusion are:

Tuition expenses: Tuition expenses strictly mean that the money is to be gifted to pay the tuition fees and does not include the living expenses, expenses on books, food, etc. If you want to be exempted from the gift tax you have to make sure that you are making the payment directly to the concerned institution and not to the individual.
Medical expenses: Like tuition expenses, the medical expenses have to be paid to the medical institution or the hospital where the individual is being treated. Make sure that you are not reimbursing the money through insurance as it will make the gift eligible to be taxed.
Gift to spouse and political organizations: The gift will remain non-taxable if you have given it to your spouse and other political organizations.

This was a bit of information about annual gift tax exclusion. Many people use gift tax exclusion strategically to plan out their taxes. We hope that this article will be helpful in clearing all the doubts about gift tax and gift tax exemptions.

 Posted by at 9:04 am  Tagged with:

Regressive Tax

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Dec 052011
 

As you know, tax is something that is supposed to moaned about, and paid diligently, punctually and annually. It is believed that several monarchs in Europe, in the times that followed the 12th century, were overthrown due to one simple feature of their regime – tax, its systems and ways in which they were imposed, levied and collected. Values like independence or liberty, may have been put forth as a pretext for the revolts. Well, jokes aside and conspiracies apart, every person would like a better and fairer taxation system. Quite a dream, eh? Well, till then let’s moan and file our returns. Lucky we, as in the modern free world maximum taxes are collected thorough fair taxation systems such as progressive tax systems. There is one system, however, which you may not have heard of, regressive tax. This system is one of the oldest systems and is a cousin of flat tax.

If I may be frank, regressive tax as the name suggests is a bit meaner than flat tax, however, certain cases makes its use inevitable. The following paragraphs will take you through the definition, mechanism and examples of this taxation system.

Regressive Tax: Definition and Concept

Let’s put down the definition in one simple, sentence. A regressive tax is a tax where the rate of tax increases as the subject of tax goes on decreasing and the rate goes on decreasing as the subject of tax goes on increasing. Sounds really unfair, does it not. This kind of system for income taxes is well beyond imagination. Regressive tax is however, not imposed on income. So if you look at it, a regressive tax is necessarily, the exact opposite of progressive tax, which is much fairer in nature and goes easy on several taxpayers. The explanation in the second paragraph, talks about the fields or taxes, where such a system is used.

In today’s world, this taxation system is used for promotional purposes such as more use of eco-friendly products reduces tax liability. With effect this taxation system promotes and also instigates some really good reforms. Apart from a promotional measure, the multi-point taxation incidence, sale of unethical but legal products and one things that are deemed unfit and pose a small amount of threat to the society, are subject to regressive tax.

The mechanism of this taxation system is same as before, that is, the tax rate is imposed as per the subject. Here is an example. Please note that example is hypothetical.

X is a company producing high grade propane, an eco-friendly fuel. For every 10 cans of propane sold, the company would be charged 15% tax per can, till it reaches a limit of 5,000 cans. After this limit the tax imposed would be 11% per can till the company reaches the 7,500 cans. After this limit, a tax of 7.5% would be levied per can.

Regressive Tax: Examples

There are some common examples that can be described for explanation. In fact we come across some of these taxes almost every day. So here goes…

  • Sin Tax: Sin tax is commonly levied for several vices such as tobacco and high alcohol level drinks. The governments prefer to shield their societies from such vices, hence the taxes that are imposed on smaller and initial volumes of these items are extensive and the rates are huge. The later levels of consumption volumes however, have lesser rates for taxation.
  • Value Added Tax: The Value Added Taxes (VAT) is levied after the completion of each stage in the production of an item. For example, petroleum from oil wells is drilled out, which is sent to refinery, where products of fractional distillation process are sold to companies who process it into multiple products. These are then sold to other vendors for delivery to the public. In such a case the owners of the oil wells pay the maximum rate of tax. However the vendors pay the minimum tax rate.
  • Payroll Taxes: Some economies, especially the ones that are pro-socialist in nature, have regressive payroll taxation system. In such cases the payroll taxes contribute to insurance and some welfare program. The rate goes on decreasing as per the increasing income.

As mentioned above, regressive taxation is not for income tax. It is a tax to promote good and better changes in society. This is all about the principle of regressive tax i.e. make less, pay more and make more pay less. I hope, that this explanation is adequate.

 Posted by at 8:58 am  Tagged with:
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