Gift Tax Myths and Misunderstandings

Tax practitioners receive questions in 2013 pertaining to gift tax for gifts made in 2012 after the opportunity to plan has passed. Here are some common misunderstandings that are frequently expressed to accountants and attorneys.

Statement:  I can give a gift of $13,000 (in 2012) to a person or trust and I do not have to file a gift tax return.

Reply:  You do not have to file a gift tax return if you make only Annual Exclusion gifts which are defined as a gift to one person of a present interest that does not exceed the annual limitation (of $13,000 in 2012).  A  gift in 2012 of $13,000 in cash to an individual qualifies as a gift of a present interest. The gift of $13,000 to a trust is a gift of a future interest and does not automatically qualify as an Annual Exclusion Gift. [There are exceptions for gifts made to trusts that require a professional to explain.]

Statement:  I can give a gift of $26,000 to one person then use my spouse’s annual exclusion and not file a gift tax return.

Reply:  No.

Statement:  Annual exclusion gifts are not taxable in New Jersey.

Reply:  Although there is no gift tax in New Jersey, these gifts, called transfers, may be added back into the taxable state for Inheritance Tax and New Jersey Estate Tax purposes if transfers are made within three (3) years of death. If a Federal Estate Tax Return must be filed, the New Jersey Estate Tax follows the federal treatment of these gifts.

Statement:  I may reimburse a person for medical care expenses he or she paid and have this reimbursement qualify for the Annual Exclusion.

Reply:  No. You must make payment directly to the medical provider. If you pay the provider, you are not required to file a gift tax return to report this transaction even if the payment exceeds $13,000 in 2012, provided you have no other gifts that must be reported.

Statement:  I can reimburse my child for my grandchild’s living expenses at college.

Reply:  No. You must pay the educational institution directly and only qualified educational expenses are eligible for favorable treatment.  Consult with your tax advisor as to what constitutes qualified educational expenses. Beer and pizza do not qualify.

Statement:  A gift to a §529 Plan is a completed gift at the time of contribution to the plan.

Reply:  True. This is based on the statute which was amended to address this point. Prior to amendment, death of the custodian of the §529 Plan who was also the donor was a problem with inclusion for estate tax.