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THEORETICAL TAXATION THREAD, FRANCIS

 
 
Reply Tue 27 Oct, 2009 01:21 pm
The question presented is:
if donor begifts a total stranger with whom no financial relationship
of any kind exists -- strangers passing in the street -- with $1,000, 000
donor may owe a gift tax, but donee will owe no income tax. True or False ?
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Type: Discussion • Score: 2 • Views: 1,864 • Replies: 20
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OmSigDAVID
 
  1  
Reply Tue 27 Oct, 2009 01:33 pm

It seems unlikely that the donor woud be liable for a gift tax
and that the donee woud also be liable for an income tax on the value of the free gift.
0 Replies
 
dyslexia
 
  1  
Reply Tue 27 Oct, 2009 01:36 pm
well I know nothing whatsoever about tax law but I do know that one can gift to anyone a limited amount (something like $12, 000) without anyone paying a tax of the gift.
DrewDad
 
  2  
Reply Tue 27 Oct, 2009 01:40 pm
IRS: Frequently Asked Questions on Gift Taxes

Quote:
Who pays the gift tax?
The donor is generally responsible for paying the gift tax. Under special arrangements the donee may agree to pay the tax instead. Please visit with your tax professional if you are considering this type of arrangement.

What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

What can be excluded from gifts?
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.

1. Gifts that are not more than the annual exclusion for the calendar year.
2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
3. Gifts to your spouse.
4. Gifts to a political organization for its use.

In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.

May I deduct gifts on my income tax return?
Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions). If you are not sure whether the gift tax or the estate tax applies to your situation, refer to Publication 950, Introduction to Estate and Gift Taxes.

How many annual exclusions are available?
The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, and $13,000 on or after January 1, 2009, the annual exclusion applies to each gift.

What if my spouse and I want to give away property that we own together?
You are each entitled to the annual exclusion amount on the gift. Together, you can give $22,000 to each donee (2002-2005) or $24,000 (2006-2008), $26,000 (effective on or after January 1, 2009).

What other information do I need to include with the return?
Refer to Form 709 (PDF), 709 Instructions and Publication 950. Among other items listed:

1. Copies of appraisals.
2. Copies of relevant documents regarding the transfer.
3. Documentation of any unusual items shown on the return (partially-gifted assets, other items relevant to the transfer(s)).

What is "Fair Market Value?"
Fair Market Value is defined as: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate." Regulation §20.2031-1.

Who should I hire to represent me and prepare and file the return?
The Internal Revenue Service cannot make recommendations about specific individuals, but there are several factors to consider:

1. How complex is the transfer?
2. How large is the transfer?
3. Do I need an attorney, CPA, Enrolled Agent (EA) or other professional(s)?

For most simple, small transfers (less than the annual exclusion amount) you may not need the services of a professional.

However, if the transfer is large or complicated or both, then these actions should be considered; It is a good idea to discuss the matter with several attorneys and CPAs or EAs. Ask about how much experience they have had and ask for referrals. This process should be similar to locating a good physician. Locate other individuals that have had similar experiences and ask for recommendations. Finally, after the individual(s) are employed and begin to work on transfer matters, make sure the lines of communication remain open so that there are no surprises.

Finally, people who make gifts as a part of their overall estate and financial plan often engage the services of both attorneys and CPAs, EAs and other professionals. The attorney usually handles wills, trusts and transfer documents that are involved and reviews the impact of documents on the gift tax return and overall plan. The CPA or EA often handles the actual return preparation and some representation of the donor in matters with the IRS. However, some attorneys handle all of the work. CPAs may also handle most of the work, but cannot take care of wills, trusts, deeds and other matters where a law license is required. In addition, other professionals (such as appraisers, surveyors, financial advisors and others) may need to be engaged during this time.

Do I have to talk to the IRS during an examination?
You do not have to be present during an examination unless IRS representatives need to ask specific questions. Although you may represent yourself during an examination, most donors prefer that the professional(s) they have employed handle this phase of the examination. You may delegate authority for this by executing Form 2848 "Power of Attorney."

What if I disagree with the examination proposals?
You have many rights and avenues of appeal if you disagree with any proposals made by the IRS. See Publications 1 and 5 (PDF) for an explanation of these options.

What if I sell property that has been given to me?
The general rule is that your basis in the property is the same as the basis of the donor. For example, if you were given stock that the donor had purchased for $10 per share (and that was his/her basis), and you later sold it for $100 per share, you would pay income tax on a gain of $90 per share. (Note: The rules are different for property acquired from an estate). [ Link to Estate Tax Q&A ]

Most information for this page came from the Internal Revenue Code: Chapter 12--Gift Tax (generally Internal Revenue Code §2500 and following, related regulations and other sources)
0 Replies
 
DrewDad
 
  1  
Reply Tue 27 Oct, 2009 01:42 pm
@dyslexia,
dyslexia wrote:

well I know nothing whatsoever about tax law

Liar! You contradict yourself in the breath!

Well, keystroke.

dyslexia wrote:
but I do know that one can gift to anyone a limited amount (something like $12, 000) without anyone paying a tax of the gift.


I name thee poopity head.
0 Replies
 
OmSigDAVID
 
  2  
Reply Tue 27 Oct, 2009 01:51 pm
@dyslexia,
dyslexia wrote:

well I know nothing whatsoever about tax law but I do know that one can gift to anyone
a limited amount (something like $12, 000) without anyone paying a tax of the gift.
Someone brought up the MILLIONAIRE TV show of the 1950s,
wherein each week a stranger was begifted with a cashier's check
for $1, 000, 000 as to which "the taxes have already been paid."

I inferred that "the taxes" in question were gift taxes
and that the new MILLIONAIRE was immune from income taxation
because the gift was not earned income.
roger
 
  1  
Reply Tue 27 Oct, 2009 01:54 pm
@OmSigDAVID,
No. Unearned income includes interest income, which is taxable.
OmSigDAVID
 
  1  
Reply Tue 27 Oct, 2009 01:58 pm
@roger,
roger wrote:

No. Unearned income includes interest income, which is taxable.
Interest is indeed taxable. I was not aware that it is deemed "unearned" by IRS. Thank u.
roger
 
  1  
Reply Tue 27 Oct, 2009 02:05 pm
@OmSigDAVID,
Unearned is better. Not subject to Social Security taxes.
OmSigDAVID
 
  1  
Reply Tue 27 Oct, 2009 07:05 pm
@roger,

Acknowledged.
0 Replies
 
OmSigDAVID
 
  1  
Reply Wed 28 Oct, 2009 05:54 am

I hope we did not lose Francis.
TTH
 
  1  
Reply Wed 28 Oct, 2009 09:12 am
@OmSigDAVID,
Based on the way your question is stated, lets see hmmm - I pick true
0 Replies
 
Francis
 
  1  
Reply Wed 28 Oct, 2009 09:38 am
@OmSigDAVID,
No, you didn't lose me, I was just busy.

Back to our question, the bottom line is: I was wrong, ipso facto you were right.

If I was a nitpicking person I could argue many situations being exceptions.

But that's not the case.

If you give one million dollars out of detached and disinterested generosity, you will not pay taxes, nor will do the donee.

However, you'll pay taxes if you donate more than 1 million dollars in your life time.

So stipulated..
TTH
 
  1  
Reply Wed 28 Oct, 2009 09:43 am
@Francis,
He used the word "may" in his sentence so basically his question is still true.

The unified gift tax credit was not a consideration.
0 Replies
 
TTH
 
  1  
Reply Wed 28 Oct, 2009 09:50 am
This talks about the credit.
http://www.irs.gov/publications/p950/ar02.html#d0e135
DrewDad
 
  1  
Reply Wed 28 Oct, 2009 11:11 am
@Francis,
Francis wrote:
However, you'll pay taxes if you donate more than 1 million dollars in your life time.

Er.... no. In the U.S., at least.

Depends on to whom you give the money, over what period of time.

If you give one million dollars to an individual in one year, then you pay gift tax on that amount.

If you give one million dollars to a registered charity, then you get to deduct that one million dollars from your income tax.

If you give $10,000 to 100 people, then you owe no gift tax.

If you give $10,000 to 2 people each, per year, over 50 years, then (assuming the current rules stay in effect) you owe no gift tax.
0 Replies
 
OmSigDAVID
 
  1  
Reply Wed 28 Oct, 2009 03:59 pm
@TTH,
TTH wrote:
Thank u for this link, TTH.
I have copied it.
0 Replies
 
OmSigDAVID
 
  1  
Reply Wed 28 Oct, 2009 04:02 pm

I am pleasantly surprized to find so many tax-savvy members of the forum
0 Replies
 
OmSigDAVID
 
  1  
Reply Wed 28 Oct, 2009 07:19 pm
@Francis,
Francis wrote:

No, you didn't lose me, I was just busy.

Back to our question, the bottom line is: I was wrong, ipso facto you were right.
Acknowledged, Francis.
Tho I have not given $1,000, 000, I actually have had a little hobby,
as of about 20 years ago, of giving $$ to unsuspecting strangers
who were passing in the street, to wit:
pretty girls in Midtown Manhattan and downtown Manhattan at lunchtime.
It is then very densely crowded, with large numbers of secretaries
on their lunch hours, to some of whom I presented $100.oo bills,
as thay passed with their friends, the donees selected upon the basis of their personal beauty.

I 'd not like to think that I increased their tax liability.

U know the old saying: "Don 't increase a pretty girl 's tax liability."



David
DrewDad
 
  2  
Reply Wed 28 Oct, 2009 09:23 pm
@OmSigDAVID,
Creepy.
 

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