While it is always nice to give or receive a gift, if the value of that gift is great enough, the federal government will want a portion of it. When considering whether or not a gift tax is owed to the federal government, you need to look at all gifts, or transfers of property for less than market value, when considering whether or not a gift tax is owed.
Who Pays
The donor or person giving the gift is generally going to be the person expected to pay the tax. In this way, the gift remains a gift to the person receiving it, the donee or recipient. The donee can pay the tax under a special arrangement, but you should consult a tax professional to make the arrangements, according to the Internal Revenue Service (IRS).
Definition of a Gift
The IRS considers a gift any transfer of property from one person to another in which less than the market value of the property is given in return. Free gifts, discounted property, using income from a property without receiving something of equal value and making interest-free or reduced-interest loans can all be considered gifts if their value is great enough. However, if the gift doesn't total more than the annual exclusion, is used to pay tuition or medical expenses for someone or is a gift to your spouse or a political organization, the IRS also considers the gift tax-free.
Annual Exclusions
An annual exclusion of $13,000 applies to each person or organization to whom you give a gift. For example, if you have three children, you can give $13,000 worth of gifts to each one of them each calendar year without having to pay a gift tax. If you and your spouse give away property you own together, each spouse can make a $13,000 gift to each child for a total of $26,000 per child.
Determining Gift Value
Gifts must be valued at the fair market value. Fair market value is the value of the property if it was sold on the open market where the seller is not forced to sell (e.g., liquidation sale) and the buyer fully understands the product he is buying. When listing fair market value of gifts, you should have copies of relevant documents that prove the value of the property in case the IRS questions it.
Reselling Gifts
If the donee receives property and decides to resell it, the cost basis of the gift that the donee will use when determining taxes is the value of the property at the time it transferred from the donor to the donee. This is because the donor has already paid taxes on the gift up to that value.
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