When receiving or giving money or items of a particular value, it is often taxable at the federal level in the United States, but it is often inconvenient and costly to do so. The concept of gift taxes confuses many Americans – especially because the annual and lifetime limitations tend to fluctuate every few years to adjust for inflation and other financial rates. To avoid any trouble with the IRS in the future, be sure to understand what gifts qualify as taxable in the United States, and what limits you should consider when buying gifts of high commercial value.
What Qualifies As Taxable Under The Gift Tax?
Simply put, all gifts – whether money, property, or other material items – are taxable under United States law. The party that is giving the gift is allowed, as of Fall 2013, to give up to $14,000 in money or in terms of gift value to others without having to report these gifts or pay taxes on them. One benefit of giving your loved one a gift – and claiming it on your own tax return – is that such gift will not need to be reported to the government, and taxes will not have to be paid by them. As such, they will benefit from your generosity in full.
Lottery winners fall into an especially interesting situation as their new source of income – even though it is from government-based sources – is taxable, and certain forms of gifting this money are taxable as well. Consider if you win a top-earning Powerball jackpot: the only way to avoid losing 39% of your total winnings is to agree to dozens of payouts over the course of three decades, so the government can continue to make profits off of your money for all of those years. Giving away any of that money as gifts has to be carefully planned. Otherwise, you might find yourself paying taxes at exorbitant rates on your winnings that you have already paid taxes on, in order to give gifts to your friends, family, and other charitable organizations.
Filing Correct Documentation Related To Gift Taxes
The document you will need to fill out that is related to your gift tax is Form 709, which is a five-page document that covers all gifts made within a particular calendar year. Following the correct instructions prepared by the IRS, and with the help of a professional tax specialist, you can be sure that you claim all appropriate gifts that, in total, are valued above the annual limit. It is also important to keep accurate records over time, even if you do not file annually to report your gifts. When calculating your taxes annually, review your old gift documentation and determine if your totals have exceeded the lifetime limit.
How You Can – Legally – Avoid The Gift Tax
Of course, it is illegal to not pay taxes when they are due. However, there are several circumstances in which it is completely legal to not pay any taxes when giving presents to others. For example, it is legally permissible to pamper your spouse with gifts of unlimited value, and this requires no payment or documentation – that is, only if your spouse is an American citizen. If your spouse does not hold U.S. citizenship, you will have to pay tax for any gifts over a $143,000 limit, a cap that has been increased in 2013 from $139,000. Donating money to a political organization also does not count as a taxable gift, and therefore need not be included in your gift tax documentation on either an annual or lifetime time frame.
Each year, be sure to check with the IRS about the current year’s new annual gift tax exclusions for non-citizen spouses and non-spouses. Though the amount has not changed drastically during the last decade, tax analysts have seen this exclusion amount increase each year by two or three thousand dollars annually. By staying even a dollar below the limit amount each year, you can maximize your gift-giving without having to worry about taxation. As aforementioned, however, it is necessary to maintain a list of receipts and other forms of documentation about your gifts, in the case that you exceed the lifetime gift tax exclusion limit in the future.