The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable. The assets you receive as a gift or inheritance are not usually taxable income at the federal level.
However, if the assets later produce income (they may earn interest or dividends, or you collect rent), that income is likely taxable. IRS Publication 525 contains the details. In addition, some states have inheritance taxes. People who receive gifts of money, or anything else of value, do not need to report gifts on their tax returns.
Gift-givers may have to report any gifts to a single person who, when combined, exceed the annual exclusion. The person providing the gift may owe tax on the gift and cannot deduct the value of the gift on their federal income tax returns. Finally, people who make donations as part of their overall estate and financial plan often engage the services of lawyers and CPA, EA and other professionals. Once you have exceeded the lifetime exclusion amount, you will be subject to gift tax rates of between 18 and 40% of the amount donated.
You can get around the gift tax by contributing to someone's 529 college savings plan with a lump sum and then distributing it over five years for tax purposes. But, if there is a national gift tax, why don't you have to declare your birthday money every year? If you're not sure if gift tax or estate tax applies to your situation, see Publication 559, Survivors, Executors, and Administrators. The IRS will provide an account transcript for gift tax returns when Form 4506-T, Request for Tax Return Transcript, is successfully completed and submitted with justification. Gift tax is discussed much less frequently compared to other common taxes, such as income or sales tax.
But you may still want to file one for cover in case the IRS later claims that the property was undervalued and that the transaction was actually a partial donation. Unfortunately, donations made to cover books or materials do not count toward educational exclusion and instead will go toward the annual donation limit. While these are the general rules regarding gift taxes, tax liability may vary depending on individual circumstances. Any lifetime donations that exceed the annual exclusion and do not qualify as tax-free medical and educational gifts are deducted from your lifetime exemption.
Tax return on gifts (and generational transfers), due on April 15 of the following year or the next business day if it falls on a weekend or holiday. There are some in Congress and the IRS who want to “recover taxes on gifts made with the highest exemption amount if the exemption is lower when the estate is processed. gift taxes don't have to be an obstacle to giving away your wealth to friends and loved ones. If you plan to donate a sizeable amount of dollars to a loved one, be sure to follow these five practical tips to avoid the gift tax on your gift.
While it is rare to find gift tax, given the exclusions and limits, there are situations where this cost may seem inevitable.