If you give anything of value, whether cash, equipment, or land, to someone as a gift, you may wonder if you or the recipient will have any tax consequences. If it is truly a “gift” and not payment for something, then generally there will not be an income tax consequence. While you should consult your CPA or attorney, in general, the only tax that may be at issue is federal gift tax. Many gifts are not subject to the gift tax. Following are a few gift tax tips:
1. General rule.
The general rule is that any gift is a taxable gift. However, as with any rule, there are exceptions, such as:
- If the value of the gift is less than the annual exclusion.
- Gifts to your spouse.
- Gifts to charities.
- Tuition or medical expenses you pay directly to the school or medical provider on someone’s behalf.
2. Annual Exclusion.
The annual exclusion for 2016 is $14,000. This means that you may give value of $14,000 to any individual this year and it will not be subject to tax. A married couple can give $28,000 to one individual. There is no limit on the number of individuals you may give the $14,000 to this year. For example, if you are married and have a child that is married with three kids, you can maximize the annual exclusion and give your child’s family $140,000 of gifts with no gift tax liability. Simply, you can give $14,000 to each of the 5 people, and your wife can do the same – $14,000 * 5 * 2.
3. Gifts are not deductible.
Other than deductible charitable contributions, the value of a gift is generally not (income tax) deductible.
4. Who pays the gift tax?
Even if a gift is subject to gift tax, there is no tax liability (tax due) until the total value of lifetime gifts by the donor (the one making the gift) exceeds the gift tax exemption amount, which is $5.45 million for 2016. It is the donor (the giver) who is taxed. A recipient of a gift has no tax liability.
The use of gifting is not a one-size-fits all plan and there are a number of ideas that you may want to consider while tax planning. Specifically, if you consider the math on using the annual exclusion, it may be possible to transfer some value of your farm to your kids during life without a tax consequence at the time of transfer. However, there are a number of related issues that you should consider such as whether you want to share ownership during your life, your tax basis, and whether your estate will be subject to federal estate tax liability.
