It's The Holiday Season. Can Your Gifts Be Taxed?

The holiday season is upon us. The malls are beginning to pack and the word "Sale!" seems to be popping up everywhere. With all this gift-giving, a lot of us don't stop to thinking about how the gifts we give & receive may affect our taxes.

Now, little things like CDs and clothes have no value. But bigger gifts, like cars, vacations, and real estate do.

Death & Taxes has a good series on gift tax up.

It's 4 parts:
Intro: What Is Considered a Taxable Gift
Credits and Exclusions
The "Unified" Credit: You can give up to $1 million in your life without having to pay tax.
Conclusion: When To Hire a Professional to Arbitrate the Giving

Further Reading:
Taxable Income & Gifts: Part 1
Taxable Income & Gifts: Part 2

Taxable Income & Gifts: Am I Screwed? PART TWO

Taxable Income & Gifts: Am I Screwed? PART ONE

So, from my previous post we know that gifts and inheritances are NOT usually taxable.

... But the fine print here is that you still must report the gift and it may be taxable if it exceeds certain amounts.

Why might it be taxed?

Taxable Gifts

Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift. It is taxable if it exceeds $12,000, $24,000 if married filing jointly.

Gifts That Are Never Taxed

• tuition or medical expenses you pay directly to an educational or medical institution for someone’s benefit
• gifts to your spouse
• gifts to a political organization
• charitable donations

Estate Taxes

To put it simply, taxable on the amount that's over 2 million for a year of death in 2006 or 2007. Report inheritance on a 1041 K-1.

Appreciated Securities

If you pass on stocks or mutual funds, the tax burden is then transferred to the new owner. Simple as that!

See here for direct info from the IRS on Estate and Gift Tax. For more general info on gift tax from the IRS see here.

And, as always (and especially in this case), consult your tax professional (please!).

Taxable Income & Gifts: Am I Screwed? PART ONE

So, you've received a gift from a relative of a sizable sum. And it's tax time. What do these things mean? Headache and worry. Do I report? Is it taxable?

Let's get into what is and is not taxable first.

The basic distinction that makes something taxable or not taxable is whether or not it can be included as income...

Some common examples of items that are not included in your income are:

• Adoption Expense Reimbursements for qualifying expenses
• Child support payments
• Gifts, bequests and inheritances
• Workers’ compensation benefits
• Meals and Lodging for the convenience of your employer
• Compensatory Damages awarded for physical injury or physical sickness
• Welfare Benefits
• Cash Rebates from a dealer or manufacturer
• Tax Exempt Interest from municipal bonds and tax exempt bond mutual funds. Although this interest is usually not taxed it must be reported on line 8b of Form 1040 or 1040A.

Examples of items that may or may not be included in your income are:

• Life Insurance. If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.
• Scholarship or Fellowship Grant. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.

All other items, unless specifically excluded by law, must be included in your income. This income may be in a form other than cash. For example:

• Bartering. Bartering is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included on Form 1040 in the income of both parties.
• Gambling winnings- this includes lottery winnings.
• Prizes – if you win a prize in a contest.

So, basically, if it CAN be income, it SHOULD be taxed. See this IRS publication for a more specific explanation.

Now, this seems pretty clear cut. Gifts and inheritance are NOT taxable. But the IRS is a sneaky thing and there are nuances to this rule. See PART TWO for more.