Section 61 of the Tax Code states that “except as otherwise provided in this subtitle gross income means all income from whatever source derived”. Thus, the federal tax law requires taxpayers to pay income taxes on earnings, commissions, rents, royalties, retirement benefits, investment profits, tips, fringe benefits, bonuses and almost anything else of value, unless the Internal Revenue Code specifically provides an exception to the general rule contained in §61. An exception to the general rule is §102 of the Internal Revenue Code.
Section 102 of the Internal Revenue Code contains the federal tax law governing gifts and inheritances. According to § 102(a) of the tax code, gross income does not include the value of gifts or inheritances. The tax code also treats a gift exchange as a neutral event in limited circumstances resulting in neither taxpayer-donors nor taxpayer-donees paying taxes on qualifying gifts.
Section 102 provides that the value of property acquired by gift is excluded from gross income. A gift “proceeds from a ‘detached and disinterested generosity,’ … ‘out of affection, respect, admiration, charity or like impulses.’” Commissioner v. Duberstein, 363 U.S. 278, 285 (1960) (citations omitted). On the other hand, payments that proceed primarily from “the constraining force of any moral or legal duty” are not gifts. 363 U.S. at 285.
The Internal Revenue Code places the responsibilities of paying income taxes on estates rather than beneficiaries. Estate administrators or executors must file all required tax forms on behalf of both the deceased taxpayer and his estate. However, federal estate exclusion laws allow estates to exclude up to the threshold annual tax amount for any property transfers. In 2015, this threshold amount was $5.43 million. The estate property includes all property owned by the decedent at the time of his death.
For 2015, the gift limit was $14,000 per donee, per year. If a taxpayer gave a gift exceeding $14,000 to a donee in 2015, the law requires the donor, and only the donor, to pay taxes on the gift. If the gift is $14,000 or less, neither the donor nor the donee is required to pay taxes on the gift transfer. Also, the Internal Revenue Code allows taxpayers to give unlimited gifts covering educational and medical costs, limited in some cases only by the method of transfer.
Federal income taxes are however due if donees sell their gifts but are aided by the Internal Revenue Code, in limited circumstances, allows donees to step-up or increase their taxable property basis on the value of their gifts.
If you are the potential donor or donee of a gift and have questions regarding whether it is a taxable event, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
