39.2 Gift Tax Basics

When you consider making gifts of cash or property, you must consider possible gift tax liability. However, it is possible to make substantial gifts without incurring gift tax liability because of exclusions allowed by the tax law. Even where a gift is technically subject to the gift tax, liability computed on Form 709 can generally be avoided by applying the lifetime credit, which for 2012 effectively exempts up to $5,120,000 of taxable gifts from the tax (39.4).

The annual exclusion and other tax-free gifts.

Gift tax liability may be avoided by making gifts that do not exceed the annual exclusion. The annual exclusion applies separately to each donee to whom you make gifts during a calendar year. For 2012, the per-donee exclusion is $13,000, or $26,000 if your spouse consents on Form 709 to “split” the gifts. The annual exclusion is allowed only for cash gifts or gifts of present interests in property; gifts of future interests do not qualify. For 2013, the amount of the annual exclusion is expected to increase to $14,000, but this had not yet been officially announced by the IRS when this book went to press; see the e-Supplement at jklasser.com for an update.

Gifts to your spouse are completely tax free under the gift tax marital deduction if your spouse is a U.S. citizen at the time of the gift. For gifts to a spouse who is not a U.S. citizen, there is an annual exclusion; for 2012 gifts, the exclusion is $139,000, provided that the $126,000 excess over the basic $13,000 annual exclusion otherwise qualifies for the marital deduction.

There is an unlimited gift tax exclusion for payments of another person’s tuition or medical expenses, if you make the payment directly to the educational organization or care provider. The medical and educational exclusions are allowed without regard to the relationship between you and the donee for whom you are making the payments. The exclusion for directly paid educational expenses applies only to tuition, not to room and board, books, or supplies.

Contributions to a qualified tuition program (QTP; see 33.5) on behalf of a designated beneficiary do not qualify for the educational exclusion, but do qualify for an enhanced annual exclusion. You can elect to treat a QTP contribution over the basic annual exclusion as if it were made ratably over a five-year period, but only up to five times the annual exclusion. For example, a QTP contribution made in 2012 of up to $65,000 may be treated as if ¹/₅, or $13,000, had been contributed in 2012 and in each of the next four years. Thus, the entire gift up to $65,000 can avoid gift tax and if your spouse consents to split the gift on Form 709 (39.3) the exclusion increases to $130,000. If you make QTP contributions for more than one person in the same year, you can make the special QTP election for each of them.

Taxable gifts.

If you make a gift that exceeds the allowable annual exclusion and which is not otherwise exempt from the gift tax, you must report the gift on Form 709 (39.3). Table 39-1 (39.9) shows the tax rates applicable to taxable gifts made in 2012.

Basis for property received as gift.

The basis for appreciated property received as a gift is generally the same as the donor’s basis. If gift tax was paid by the donor, basis is increased. The basis computation is explained in 5.17.