Sushi Money

Many people are unaware that simply giving money to someone can result in a potentially taxable gift.  Sure people give money to others every day but for a sizable gift, cash or otherwise, the IRS has formal guidelines for the transfer of wealth in society.  Doesn’t sound fair sometimes, but if no one had to pay taxes when moving money around, that’s probably all there would be! Elaborate schemes to hide and shelter money, resulting in a system of taxation that was crazy.  Wait a minute… that sounds like what we have today!  Yes, but for gifts it’s a little different and we do need to abide by the law.  In many cases there are choices to be made… if not considered carefully we may owe far more taxes on gifts than realized. 

Let’s say you win a $1,000,000 lotto, and you decide you want each of your other 4 siblings to have $200,000.  You’ve been waiting for this day… so what do you do?  Walk to the lotto office, smile for the cameras and hold up that big check?  Then give each of your siblings the money?  That’s very nice of you… and for 2007 the IRS will thank you as well when you pay up to $50,960 gift tax on each of those $200,000 gifts!  That would effectively mean you paid $203,840 in taxes out of the original $1,000,000, leaving you to divide up $796,160.  Subtracting your own $200,000, you would only have $596,160 to divide up among your four siblings, each receiving $149,040 .  Not bad you say… which is true, but I would rather have the original $200,000!  What’s the better strategy?  Well, perhaps there’s not a formal guideline- but I talked about this with a few other people, and if it were me I would contact my siblings personally, and have them pay for the portion of the lotto tickets I purchased.  Then we could all walk down to that lotto office together and have the State or Lotto Agency write seperate checks for each of us!  No gift taxes would be due and we would each have the original $200,000.  Just an example to consider, and maybe not legal or even ethical depending on the circumstances. 

Giving money to others is a generous and charitable thing to do… but doing so may have unforeseen tax ramifications. More appropriate to most of us, for 2007 the current annual gift exclusion is $12,000.  If you want to give your four kids each $12,000- so be it.  You want to give your neighbor $12,000… that’s fine.  There is a lifetime gift limit of $1,000,000 to consider, after which gift taxes may be due.  Even if no gift taxes are due, when giving cash in excess of the annual gift tax exclusion amount you may be required to file a gift tax return.  Maybe not a factor for most of us, but definitely a consideration for estate planning and the wealthy.  If I did get $1,000,000 from the lotto individually, I would be sure not to give more than $12,000, or the annual exclusion amount, to each person each year!  But there is certainly a ”tax bite” that can occur without prior thought.  Any time someone “comes into money” it would be wise to sit down with an objective professional such as a Certified Financial Planner or CPA to discuss options.  

 Regardless of how we give, there are also beneficial tax considerations when making donations.  There may be valid, legal deductions available that can lower the taxes you must pay on your income each year.  And for larger donations of cash or valuable property, there are limitations on the deductibility of such gifts based on your income.  It is also important to note that unless you are making donations to qualified charitable organizations or non-profit entities, you may be making a gift that will incur taxes- money you must pay to the IRS based on the size of your gift.  It’s a good idea to speak with your tax planner or CPA to make an informed decision benefiting both the charity and your potential tax liability.  For general information, check out these useful links on taxes and charitable giving:

• A short overview on tax considerations is discussed in The Tax Perks of Charitable Giving from SmartMoney.com. 
• Fairmark’s Tax Guide has an excellent multi-page overview of the Tax Rules for Gifts.
• For those who may make larger cash donations and have trust or estate planning concerns, T. Rowe Price has an overview of The Tax Value of Charitable Giving.

So what isn’t taxable regarding gifts?  What does the IRS say it’s okay to give to others without concern for taxation?  Quite simply, medical and education costs, and gifts to your married spouse (there is currently an unlimited lifetime gift exclusion within a marriage), or to a qualified charity (there is also an unlimited lifetime gift tax exclusion on gifts to qualified charities).  You can pay for anyone’s medical care, without fear of taxation, as long as you pay directly to the medical institution for those health care costs.  Likewise, you can pay tuition costs for anyone as long as you pay the money directly to the educational institution.  If you give the money to the individual to pay for it themselves?  Then it’s a “gift” with potential tax consequences.  So there are many considerations and tax ramifications to “giving” money, or property, away.  Do you want to give your house to a family member?  That may be a gift… Do you want to give your car away?  Again, a gift…  When in doubt, always see a professional for discussing specifics about your situation!

• For detailed tax regulation information, see the most current IRS guidelines found in IRS Publication 526 (pdf file).

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