This may be a very silly question, but I’m having trouble figuring out the answer.
John thinks that Mary is swell. To demonstrate his keen regard for her, he gives her $11,000 as a gift.
According to the IRS, this $11,000 falls under the gift tax exemption.
Does this mean that Mary does not need to pay any taxes on this $11,000? Or does it mean that if John had given her $22,000, John would have had to pay a tax relating to the gift?
Daniel
Under the now $12,000 exemption, neither pays any additional tax on the gift. If the gift is over the $12,000 exemption ($24,000 for a married couple) then the giver has to pay taxes on it. In no case is the givee liable for taxes on money gifts.
Thanks, Shagnasty! It surprises me that the recipient pays no taxes on money gifts, but I’m sure not complaining in this case.
Daniel
Something you want to share with us about you and John?
It would get a little out of control if all money gifts were taxable to the recipient.
“Wow, thanks for the $50 for my birthday Grandma! Let me just go make a note of in Quicken for my accountant before I forget. Part of that goes right back to Uncle Sam you know.”
The money has already been taxed in the form of income taxes or something else so it isn’t like it is a huge loophole.
Assuming they are all to different people, there is no limit to the number of $12k gifts you can give, right? For example, Bill Gates could gift his entire fortune away to the populace of the world.
And there is no limit to the number of gifts you can receive? So my hunderd closest friends could all give me $12k tax-free, correct?
Is there a requirement that the gift-exemption not be for services rendered?
All of that is correct as far as I understand and I have spent some time trying to understand it and have gone through it myself.
The key is the gifter-givee pairing and that has a limit of $12,000 a year.
If either part of that is different, the exemption can still be used. You could receive $120,000 from 10 different people as gifts in a year and that is fine. It can’t be for services because that is income and someone could get in big trouble trying to shelter income as a gift.
In practical terms, this has meant that elderly multi-millionaires write checks up to the exemption for some family members every holiday season in order to dwindle down their estate so it isn’t subject to so many estate taxes when they die. This won’t be as important when the estate tax expires in a few years.
I have been the beneficiary of this a few times so I have tried to understand the rules and explain to people that it is fine to give $24,000 to a married couple. Some people still don’t get that.
What Shagnasty said. Remember that the exemption of $12,000 per year per donee is a running total. It means you have to add up the total gifts given to a donee during the year: birthday presents, dinner out, Christmas gifts, etc. In law school, I took a Estate and Gift Tax class (which actually mostly consisted of war stories). One of the lawyers teaching it told a story about spending Christmas with one of his uber-rich families, and cringing as gifts were opened because he knew no tax had been paid. (Apparently, at least one racehorse was gifted that holiday season.)
Think about how this applies to engagement rings for the very rich: assume that John and Mary get engaged, and John gives Mary a $200,000 ring. John would need to pay gift tax on that ring, right? What my teachers taught us is that John should not give Mary the ring, but should instead give her an option on the ring (something that has value less than the value of the ring), and inform her that she can own the ring if they get married. Once married, John can give the ring to Mary because of the marital deduction: there is no limit on gifts between spouses.
There was a time when I flirted with becoming an estate lawyer for the very rich. But then I took a look at the tax code…
So to get back to the OP, if John gives Mary $11,000 and has given her no other gifts that year, the amount is below the threshold and no tax is due.
So am I correct in my understanding that a gift, up to 12k (24k for a married couple) is a tax-exempt deduction for the recipient, but not for the giver? Or do both get an exemption? (I’m not the OP, just a foolish youngin’ trying to understand money better)
Ah, imagine how romantic that would be…
(Candlelit dinner in the finest restaurant on the French Riviera. John gets on one knee and shows Mary a truly exquisite gem, which values more than the GDP of a small African nation.)
John: Mary, I know this is a long time in coming, but… will you marry me?
Mary’s eyes sparkle, she is enchanted.
Mary: Oh John, yes, yes I will!
John puts the ring back in his pocket, sits up, and opens his briefcase.
John: OK, great, I just need you to sign here and here… and oop, here too, and… looks like we’re all set. Perfect.
They kiss, and fireworks launch outside at that exact moment. They live happily ever after.
The recipient is also called the donee (the one getting the donation) and the giver is called the donor.
The donee takes the gift tax-free; the donor pays the gift tax, if any. It isn’t an issue of tax deductions (deduction is a term of art; think of your income taxes and the standard deduction vs. the itemized deduction). Instead, the donee simply doesn’t have to pay taxes on the gift – she doesn’t have to declare it as income. The donor, by contrast, does have to declare the gift unless it’s below the threshold.
Think of it this way: John works and makes an annual salary of $50,000. John pays income tax on that $50,000. John then decides to give some money to Mary. If he gives her $12,000, the exemption amount, he pays no gift tax on it. If he gives her more than $12,000, he has to pay gift tax on that amount over the exemption amount. Here’s the IRS page on the issue.
To clarify the “married couple” example, each person gets a $12,000 limit on what they can give. So a married couple could give $24,000 to a person, because each half of the married couple is giving $12,000, which is the limit. In the same way, a single person can give $24,000 to a married couple, because she is essentially giving $12,000 to each person in the marriage.
Hold yer horses there. I have never heard about that part. Does that mean that a married couple (say parents) can give another married couple (say child and spouse) $48,000 a year if they criss-cross the money all 4 ways?
That would be sweet.
From the IRS website linked above:
A and B are married to each other; C and D are married to each other. A gives C $12,000 and D $12,000. B also gives C $12,000 and D $12,000. Thus, C and D collectively have received $48,000, all of it exempt from gift tax, because neither A nor B exceeded the gift tax limit.
I am not your lawyer; this is not legal advice. Rely on it at your peril.
The Tax Code would be elegant if gifts were taxed by the recipient (and elegance is in fact one of the Code’s occasional virtues), but it’d be a nightmare to administer. Mrs. Cliffy and I had to pay taxes on an inheritance we received (it was a retirement account and passage by will counts as a taxable distribution) and it was a frikkin’ nightmare. Especially because the stock in the account had dropped precipitously between Jan. 1 and Apr. 15.
–Cliffy
Probably not, but he’d have to file a Gift Tax return. He wouldn’t owe taxes unless he had used up his unified credit (currently $345,800, which permits lifetime gifts of $1M). http://www.irs.gov/businesses/small/article/0,,id=98968,00.html; http://www.irs.gov/pub/irs-pdf/p950.pdf (pdf); http://ceb.com/newsletterv1/estate_plan_law.htm
Here is a previous thread in which we discussed some of these issues: How does the law deal with someone paying a debt on my behalf?
So a lottery winner who wins $10 million, for instance, and wants to distribute it to his family, has to pay taxes on the winnings, and then on the gifts…OK, got that.
Could the lottery winner say,“my family and I purchased this ticket together, person A gets 5%, person B holds 10% equity”…etc and avoid the gift tax?
What about a poker tournament? You could say “person A staked 10% of the buy in fee, person B staked 7%…”
It does sound like there could be some big loopholes. What if some rich person gives $12,000 to 100 people with the intent that each of them give $11,500 each to his granddaughter who wants a nice house?
To some extent you could if it was actually true. The IRS has a form (5754) for identifying multiple payees for a win. Casino City Times Gaming Gurus
After he gives it to them, it is theirs to do with as they wish. I don’t see how this could be prevented. I suspect that any sort of contractual obligation forcing them to transmit the money to the granddaughter would make it no longer, a gift, right?