If you receive a gift, you do not have to report it as income to the IRS. The gift, however, may subject the donor to gift tax liability. A “gift” for tax purposes is any transfer where full consideration (measured in money or money's worth) is not received in return. Thus, if you “sell” you home, worth $400,000 to your child for $200,000, the IRS will treat the transfer as a gift of $200,000.
What is a taxable gift?
The general rule is that any gift is a taxable gift, except the following:
1. Gifts that are not more than the annual exclusion for the calendar year. For 2010, this amount is $13,000 per done.
2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
3. Gifts to your spouse.
4. Gifts to a political organization for its use.
In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.
What is the annual exclusion?
The annual exclusion applies to gifts to each donee. In other words, in 2010, you can give each of your children $13,000, without paying any gift tax consequences. Additionally, your spouse can also give your children $13,000, making a total combined gift of $26,000 per year.
This exclusion is an annual exclusion. Thus, $13,000 can be given on December 31, 2009 and another $13,000 on January 1, 2010.
What if I sell property that has been given to me?
The general rule is that your basis in the property is the same as the basis of the donor. For example, if you were given stock that the donor had purchased for $10 per share (and that was his/her basis), and you later sold it for $100 per share, you would pay income tax on a gain of $90 per share.
This is why for estate planning purposes, it usually makes sense to gift items that have not appreciated in value. In the example, the stock transferred via an estate would receive a “stepped-up” basis. Thus, the stock purchased by the decedent for $10, worth $100 per share at the time of death, and later sold for $100, would cause the done to pay no income tax.
ESTATE AND GIFT TAX QUESTIONS ARE COMPLICATED AND ONE SHOULD SEEK COUNSEL REGARDING ANY QUESTIONS THAT YOU MIGHT HAVE.
