With the year-end approaching and the holiday season along with it, gifts are on everyone’s mind. However, for a U.S. taxpayer, giving and receiving gifts beyond a certain limit is taxable by the Internal Revenue Service (IRS).
AG Tax professionals will now explain Gift Tax and its related thresholds, returns and penalties, which may be useful for all US taxpayers.
What is a Gift?
Any direct or indirect transfer of property (including money) by one individual to another, where full consideration (measured in money or money’s worth) is not received in return, is considered as a gift.
It also includes the sale of something at less than its current value or providing a loan at an interest-free or reduced-interest rate.
Items not considered as gifts, according to the IRS:
• Gifts that are worth less than the yearly exclusion limit ($14,000 for 2013)
• Tuition or medical expenses that a taxpayer pays for someone else
• Gifts to spouse
• Gifts to a political organization for its use
• Gifts to certain qualifying charities
What is Gift Tax?
It is a tax levied on the value of the gift, if it beyond the IRS allowed threshold limit. An individual is allowed up to $5.25 million (as of 2013) to be distributed as gifts during his/her entire lifetime.
Threshold limits for 2013:
• $14,000 – For an individual tax filer
• $28,000 – For a married couple
• $143,000 – To a nonresident alien spouse
• Remainder of the $5.25 million – For a deceased individual (i.e. their estate)
Please be advised, threshold limits may change on a yearly basis.
Who pays the Gift Tax?
It is usually the individual giving the gift who is subject to this tax. However, the receiver can choose to pay the taxes instead. It is strongly advised that a taxpayer consults a tax professional regarding the right arrangement in his/her situation.
What Tax Returns need to be filed?
In general, the donor needs to file Form 709 (United States Gift [and Generation-Skipping Transfer] Tax Return) on or before April 15 of the year following the year in which the taxable gift is made. A six-month extension is available by filing Form 8892 (Application for Automatic Extension of Time to File Form 709 and/or Payment of Gift/GST Tax). However, the extension of time to file the form does not extend the time to pay the tax.
For assistance with properly completing and filing these forms, please contact an AG Tax professional.
With regard to annual income tax returns, the gift’s value cannot be claimed as a deduction.
Please note that gifts received from foreign persons are subject to different reporting requirements, which is discussed in another article (Gifts from a Foreign Person (non-U.S.) must be disclosed to the IRS).
What Penalties can be given?
• Late filing and/or payment
Penalties are assessed for both late filing and late payment (without a reasonable cause). The penalty is 5% of the net tax due. If the return is late by 60 or more days, the minimum penalty is $100 or 100% of the tax owed (the lesser of the two). If the IRS finds that the reason for late filing is due to fraud, an additional penalty of 15% is imposed per month, which cannot be more than 75% of the net tax due.
• Gift undervalued
If the IRS determines that the gift value was intentionally undervalued by 50% which resulted in a tax underpayment of $5,000 or more, a 20% penalty is imposed on the underpaid tax amount. If the gift is undervalued by 75% or more resulting in an underpaid amount of $5,000 of more, the individual will be liable to a 40% penalty.
• Interest
The IRS charges interest on the unpaid tax amount from the first day of the due tax return until clearance of the taxes and penalties.
Taxation of monetary gifts is fairly simple. However when it comes to gifts in the form of real estate, stocks, and other investments, it can be more complex. It is advisable that a taxpayer consults a tax practitioner before making valuable gifts, in order to help minimize taxes.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
