Are You Required To File A Gift Tax Return?

Article Highlights:
A gift tax return must be filed if you give gifts in excess of $14,000 per recipient during the year.

• Directly paid medical and educational gifts are excluded
• Married individuals can increase the annual $14,000 exclusion to $28,000 by splitting gifts.
• The estate tax exemption can be used to offset gifts in excess of the annual exclusion.

Frequently, taxpayers think that gifts of cash, securities, or other assets that they give to other individuals are tax-deductible and, in turn, the gift recipient sometimes thinks that income tax must be paid on the gift received. Nothing is further from the truth. To fully understand the ramifications of gifting, one needs to realize that gift tax laws are related to estate tax laws.

When a taxpayer dies, the value of his or her gross estate (to the extent that it exceeds the excludable amount for the year) is subject to estate taxes. Naturally, individuals want to do whatever they can to maximize their beneficiaries’ inheritances, and limit the amount of tax the estate may owe. Because giving away one’s assets before death reduces the individual’s gross estate, the government has placed limits on gifts, and if those gifts exceed the limit, they are subject to a gift tax that must be paid by the giver.

Gift Tax Exclusions – Certain gifts are excluded from the gift tax.

• Annual Exclusion – This is the annual amount that an individual can give to any number of recipients. This amount is adjusted for inflation, and for 2013, it is $14,000, and can be in the form of cash, property, or a combination thereof. For example, a taxpayer with five children can give $14,000 to each child in 2013 without any gift tax consequences. The taxpayer cannot deduct the gifts, and the gifts are not taxable to the recipients. Generally, for a gift to qualify for the annual exclusion, it must be a gift of a “present interest.” That is, the recipient’s enjoyment of the gift can’t be postponed to the future. For gifts to minor children, there is an exception to the “present interest” rule, where a properly worded trust is established. If the total of all of your gifts to each individual is not over $14,000, then there is no gift tax return filing requirement.
  
• Lifetime Limit – In addition to the annual amounts, taxpayers can use a portion of the federal estate tax exemption (it is actually in the form of a credit) to offset an additional amount during their lifetime without gift tax consequences. However, to the extent that this credit is used against a gift tax liability, it reduces the credit available for use against the federal estate tax at the time of the taxpayer’s death. For 2013, the credit-equivalent lifetime gift tax exemption is $5.25 million. If you made a gift to any individual in excess of $14,000 during the year, a gift tax return filing for the year is required even if there is no tax due. The filing allows the IRS to track your federal estate tax exemption reduction as a result of gifts, and includes the tax if you exceed the current lifetime limit.
  
• Education and Medical Exclusion – In addition to the amounts listed above, there are two additional types of gifts that can be excluded from the gift tax:
  
  (1) Amounts paid by one individual, and on behalf of another individual, directly to a qualifying educational organization as tuition for that other individual.
  
  (2) Amounts paid by one individual, and on behalf of another individual, directly to a provider of medical care as payment for that medical care. Payments for medical insurance qualify for this exclusion.

Caution: Watch out for unintended gifts such as when an elderly parent places a child on title of the home or other assets.

Gift-Splitting by Married Taxpayers – If the gift-giver is married and both spouses are in agreement, gifts to recipients made during a year can be treated as split between the husband and wife, even if the cash or property gift was made by only one of them. Thus, by using this technique, a married couple can only give $28,000 a year to each recipient under the annual limitation previously discussed.

If you believe that you have a gift tax filing requirement, have additional questions, or would like this office to assist you in planning an appropriate gifting strategy, please call.

Is Your Company Leaving Tax Deductions on the Table?

If your company participates in a manufacturing or production process, you might be leaving money in the table

There is a deduction for the sale, lease/rental or license of production activities, officially called the “domestic production activities deduction”.  It is also called the “Section 199” or “DPAD”.  The deduction is the lesser of 9% of net qualified production activities income, 9% of taxable income or 50% of W-2 wages paid by the company to domestic production employees.  The deduction cannot reduce net income below zero, but it can be used against the AMT.  However many states including California, New York and Oregon do not allow the deduction.

The deduction is limited to production activities in the US and is available for the following:

(1)  Oil & gas production

(2)  Agricultural processing (i.e. farmers) including cooperatives

(3)  Manufacturers

(4)  Construction

(5)  Engineering

(6)  Architecture

(7)  Computer software production

(8)  Motion picture production

(9)  Music production

The following example was used in a Congressional hearing defines what is and is not a qualified domestic production activity:  “Suppose you are a baker and in the business of producing donuts. Some of the donuts you sell retail directly to the consumers, and some you sell in bulk to hotels and restaurants. The production costs of the donuts sold at retail do not qualify for the deduction, while the costs associated with the wholesale sales to the hotels and restaurants do”.

The deduction is not limited to just the manufacture or producer, but is also available to companies who outsource the manufacturing or production.  However only one company can take the deduction.  In this case, things can get a bit complicated for the company that takes the deduction and must provide documented proof of the following:

(1)  A statement that explains the basis for the taxpayer's determination that it had the benefits and burdens of ownership in the year or years under examination

(2)  A certification statement, using an IRS form, signed by both companies

If you have already taken this deduction or thinking you should, be warned this is an area the IRS loves to audit.

Please call this office if you wish more information

 

 

Documenting Charitable Contributions

In recent years Congress has passed stringent recordkeeping rules for charitable contributions and harsh penalties fir understating taxable income.  The following recordkeeping rules, though not all-inclusive, should be a good guideline.  .

Cash Contributions - Cash contributions include those paid by cash, check, electronic funds transfer, or credit card (see special requirements for payroll cash contributions). You cannot deduct a cash contribution, regardless of the amount, unless you can document the contribution in one of the following ways.

1. A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include:

(a)  A canceled check

(b)  A bank or credit union statement, or

(c’)  A credit card statement.

2. A receipt (or a letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.

As a result, if you drop cash into a church collection plate each week at a worship service, you cannot legally deduct that donation on your tax return. The same goes for dropping a cash donation into the Christmas kettle. Instead, you should write a check to the charitable organization of your choice and put the check into the collection plate, or make other arrangements with the organization for giving your tax-deductible contribution to ensure that a bank record, receipt, or letter is provided.

Payroll Contributions - For contributions made by payroll deduction, you must keep:

1. A pay stub, W-2 form, or other document provided by your employer that shows the date and amount of the contribution, and
2. A pledge card or other document prepared by or for the organization to which you are donating that shows the name of this organization. If the employer withheld $250 or more from a single paycheck, the pledge card or other document must state that the organization does not provide goods or services in return for any contribution made to it by payroll deduction. A single pledge card may be kept for all contributions made by payroll deduction, regardless of the amount, as long as it contains all of the required information.

If the pay stub, W-2 form, pledge card, or other document does not show the date of the contribution, you must also have another document that does show the date of the contribution. If the pay stub, W-2 form, pledge card, or other document does show the date of the contribution, you need not keep any other records except those described in (A) and (B).

Non-Cash Contributions - Non-cash contributions include the donation of property, such as used clothing or furniture, to a qualified charitable organization.

Deductions of Less than $250 - If you claim a non-cash contribution of less than $250, you must get and keep a receipt from the charitable organization showing:

1. The name of the charitable organization,
2. The date and location of the charitable contribution, and
3. A reasonably detailed description of the property that was donated.

 

You are not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site). However, you still must document the contribution as described above.

Deductions of at Least $250 but Not More than $500 - If you claim a deduction of at least $250 but not more than $500 for a non-cash charitable contribution, you must have and keep an acknowledgment of the contribution from the qualified organization. If the contributions were made in more than one donation of $250 or more, you must have either a separate acknowledgment for each or one acknowledgment that shows the total contribution. The acknowledgment(s) must be written and should include the following:

1. The name of the charitable organization,
2. The date and location of the charitable contribution,
3. A reasonably detailed description (but not necessarily the value) of any property contributed,
4. Whether or not the qualified organization gave you any goods or services as a result of the contribution (other than certain token items and membership benefits), and
5. If goods and/or services were provided to you, the acknowledgement must include a description and good faith estimate of the value of those goods or services. If the only benefit received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so and does not need to describe or estimate the value of the benefit.

Deductions of over $500 but Not over $5,000 - If you claim a deduction of over $500 but not over $5,000 for a non-cash charitable contribution, you must get and keep the same acknowledgement and written records as for contributions of at least $250 but not more than $500 (as described above).

In addition, the records must also include:

1. How the property was obtained (for example, by purchase, gift, bequest, inheritance, or exchange).
2. The approximate date the property was obtained or, if you created, produced, or manufactured the item, the approximate date the property was substantially completed.
3. The cost or other basis, and any adjustments to the basis, of property held for less than 12 months and, if available, the cost or other basis of property held for 12 months or more. This requirement, however, does not apply to publicly-traded securities. If you are not able to provide information on either the date the property was obtained or the cost basis of the property, and there is reasonable cause for not being able to provide this information, a statement of explanation must be attached to the return.

Deductions over $5,000 - Because of special rules related to contributions over $5,000, please call this office for documentation requirements of the particular contribution before making the contribution.

Out-of-Pocket Expenses - If you render services to a qualified organization and have unreimbursed out-of-pocket expenses related to those services, the following three rules apply.

1. You must have adequate records to prove the amount of the expenses.
2. You must get an acknowledgment from the qualified organization that contains:
a. A description of the services provided,
b. A statement of whether or not the organization provided you with any goods or services to reimburse you for the expenses incurred,
c. A description and good faith estimate of the value of any goods or services (other than intangible religious benefits) provided as reimbursement, and
d. A statement that the only benefit received was an intangible religious benefit, if that was the case. The acknowledgment does not need to describe or estimate the value of an intangible religious benefit.

3. The acknowledgement must be obtained before the earlier of the following:
a. The date of filing the return for the year in which the contribution was made, or
b. The due date, including extensions, for the return.

Car Expenses - When you claim expenses directly related to the use of your car to provide services to a qualified organization, you must keep reliable written records. Whether the records are considered reliable depends on the facts and circumstances. Generally, your records will likely be considered reliable if made regularly and/or near the time the expense was incurred. The records must show the name of the organization being served and the date each time the car was used for a charitable purpose. If the standard mileage rate of 14 cents per mile is used, the records must show the miles driven for the charitable purpose.

If you deduct actual expenses, the records must show the costs of operating the car that are directly related to a charitable purpose. General repairs and maintenance expenses, depreciation, registration fees, or the costs of tires or insurance cannot be deducted.

Vehicle Donations - When the deduction claimed for a donated vehicle exceeds $500, IRS Form 1098-C (or another statement containing the same information as Form 1098-C) furnished by the charitable organization must be attached to your filed tax return. Without the 1098-C or other statement, no deduction is allowed. When the charity sells the vehicle, Form 1098-C (or other statement) must be obtained within 30 days of the sale of the vehicle.

CAUTION: With the exception of vehicle contributions, charitable gift acknowledgements must be obtained before the earlier of the following:

1. The date on which your return was filed for the year in which you made the contribution, or
2. The due date, including extensions, for filing the return.

If you have questions regarding charitable recordkeeping or what is deductible as a charitable contribution, please give our office a call.