5 Gift Tax Myths Addressed
Myth 1: You have to pay tax on gifts you receive.
Truth: You don’t owe tax on gifts you receive. The person who gives the gift may owe tax. Gifts from your employer may be taxable as income. Also, if you’re given property that appreciated in value since the giver purchased it, then you get the giver’s cost basis. Additionally, if you receive over $100,000 in gifts from one or more foreign individuals, then you have to file a Form 3520 with the IRS.
Myth 2: You have to pay a tax on gifts you make that are over $10,000 a year.
Truth: There is not a limit on gifts you can give to charity or your spouse without owing tax subject to several exceptions. The $13,000 a year is per person, so you can give $13,000 to more than one person each year tax-free. Even if you exceed you annual exclusion amount in gifts, you probably won’t immediately owe anything to the IRS unless you exceed your lifetime exemption. You still have to file a gift tax return though if you go over the limit.
Myth 3: You can avoid the gift tax by loaning money at no interest then forgiving the loan.
Truth: You have to be sure to put the terms in writing, include a repayment schedule and charge a fair market interest rate. If you forgive the loan at any point, then it is considered a gift.
Myth 4: Charitable contributions can always be deducted form your taxable income.
Truth: The gift has to be made to a qualified tax-exempt charitable organization and the charitable deduction has to be itemized. If your total itemized deductions are less than your standard deduction, then your taxes won’t be reduced.
Myth 5: This is all you need to worry about.
Truth: Be sure to check your state specific tax laws.
See Erik Carter, 5 Common Tax Myths About Gifts, Forbes, Dec. 27, 2011.