Whether
part of a lifetime giving plan, or a spontaneous burst of generosity,
gifts by individuals are subject to federal gift tax rules – as well as
any applicable state gift tax rules. This article presents some
basic, general rules about the taxation of North Carolina gifts in 2014.
A “Gift tax” is a tax levied on the gratuitous transfer of
property from a gift-giver (“donor”) to a gift recipient
(“donee”). North Carolina abolished its gift tax as of 2009, so
for North Carolina gifts, only federal rules of gift taxation need be
considered.
Payment of federal gift tax is the responsibility of the
donor, and is computed and collected annually, with the return due April
15th following the year of the gift. The federal gift tax rate for 2014
is set at 40%, but because of various exclusion rules, it can often be
avoided. In fact, many gifts to, and payments on behalf of,
another can be made without having to pay any federal gift tax at all.
The following are some general rules about the federal taxation of gifts in 2014.
Annual Exclusion Gifts & Spousal Gifts
Under federal gift tax law, each person is allowed to give
an unlimited number of “annual exclusion gifts” in the amount of $14,000
per donee during calendar year 2014. (Generally, married couples
can together give $28,000 per donee.) Further, a person may give
an unlimited amount to his or her spouse by using the “unlimited gift
tax marital deduction,” as long as the spouse is a U.S. citizen.
If the spouse is not a U.S. citizen, gift tax-free transfers to the
spouse are limited instead to a “super annual exclusion gift amount,”
which for 2014 is $145,000.
Generally, none of the foregoing gifts requires the filing
of a federal gift tax return, except in the case of a married couple
giving more than $14,000 to a donee where one of the couple is joining
in the gift of the other (“gift-splitting”), rather than making a direct
gift to the donee. Annual exclusion gifts must be the transfer of
a “present interest” – the most obvious example being cash – as opposed
to a transfer of a future interest such as reversions or remainders in
real property. If a spousal gift is a transfer of a type of
interest that terminates rather than going outright to the spouse – for
example, property in trust that is only available to the spouse during
the spouse’s lifetime – the interest must be a “qualified terminable
interest” for the unlimited marital deduction to apply.
Unified Exclusion Amount
The limits set out above with respect to non-spouse donees
and non-citizen spouses draw a line above which it becomes necessary to
file a Gift Tax Return (Form 709) to avoid gift tax. Gifts in
excess of $14,000 per non-spouse donee and $145,000 for a non-citizen
spouse, respectively, can be made during calendar year 2014 without
owing gift tax if the donor files a Form 709 and elects to use part of
the donor’s unused unified lifetime estate and gift tax exclusion amount
to cover the overage. For 2014, this exclusion amount is $5.34
million. That is up from $5.25 million in 2013 – and a long way
from the $1 million cap in place as recently as 2003. The Form 709
is the mechanism by which this important election is made.
Charitable Gifts
Gifts to qualified charities may generally be made in
unlimited amounts, gift tax-free. (Likewise, gifts to political
organizations are generally tax-free.)
Direct Payments of Tuition and Medical Care
In addition to the tax-free gifts outlined above, certain
direct payments made on behalf of another are not considered “gifts” and
may be made in unlimited amounts. These include direct payments on
behalf of another person to educational institutions for tuition and to
medical providers for medical care. These payments must be made
directly to the institutions or providers (if reimbursed to the other
person, they become “gifts” subject to the gift tax rules above.)
Note: This article provides generalizations
only, and is not intended to address any particular gifting
situation. There are a number of complexities surrounding certain
gifts which are not addressed here. Moreover, the topic of income
tax as it relates to gifts is beyond the scope of this article, but can
also be a consideration for some gifts. (An example: While a
donee’s basis in inherited real estate generally is a “stepped-up basis”
equal to the fair market value of the property at the time of the
donor’s death, the donee’s basis in the same real estate gifted during
the donor’s lifetime is a “transferred basis” equal to the donor’s basis
at the time of the gift. For highly appreciated property, this
may be an important consideration in the timing of a transfer.)
The bottom-line is that you should consult your tax advisor with respect
to any particular gift contemplated.
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