More on Gift Tax



I don't think pets qualify for the annual exemption.
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Stu
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Mark and Joe,
My apologies. You're both correct.
Regards, Bill
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On 6/16/10 9:10 AM, AndyS wrote:

The only time I recommend it's ok to ignore the rules is when it results in overpayment, not tax evasion. (e.g. you can't find a stock's basis, since it's been held so long, claiming zero basis may save you more in time than you'll pay in taxes.)
I suppose any/every discussion regarding taxes can turn into "but how would I get caught?" I ignore that question, as I'd like to avoid the risk of jail.
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Why?
Many expensive gifts are jewelry. It's easy to determine who purchased it, but he presumably has enough (taxed) income to afford it.
Seth
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wrote:

Why - for various reasons.
A reason specific to the intent of this NG, might be because a taxpayer is being audited and the IRS wants to consider a $50K deposit into their bank account as unreported income - subject to taxes, penalties and interest and maybe even subject to a fraud penalty.
In order to PROVE that the money isn't taxable income the recipient will need to show where the money came from. The typical IRS audit takes place some 20 months AFTER a return is filed. If the return was due 04/15/08 and was extended to and filed on 10/15/08, it could easily take the IRS until June 2010 to pull the return for audit.
The first thing asked for at audit are 14 months of bank statements - the 12 months for the year in question plus the last month of the prior year and the first month of the subsequent year. The IRS uses this, and your tax return, to prepare a cash report - where they compare your reported income with the amounts deposited in your bank account. The look for and note discrepancies and they investigate substantial discrepancies.
Now suppose that your dear old Auntie Anne gave you $50,000 for Christmas of 2007 when you visited her on New Year's Eve 2007. That money will show up in your January 2008 bank statement and it will look like you deposited $50K more than you reported in income - which you did. The IRS will expect you to either pay tax on that money OR PROVE that it isn't taxable income.
You can claim it was whatever you want, but unless you can PROVE it to the IRS you'll be paying tax on that money.
I expect you to argue that you'll just Auntie Anne to tell the IRS about the gift. But what if Old Auntie Anne died in a tragic snow board accident in February of 2009. Being dead, she can't testify. And since she's been dead for 16 months before you even got audited her records are now long gone, the estate was closed, the records destroyed.
Now how do you prove that it was gift and not taxable income?
Were you my client, I'd have advised you to get a gift letter from Auntie Anne IMMEDIATELY. Something written in her hand and to keep it with your other important tax papers for the year in question.

Doesn't matter - there are taxes that could be due on such gifts. I recall a case from W A Y back about a celebrity, Tony Curtis (I think it was Curtis but I don't have the cite handy and I don't recall the exact details).
Anyway Old Tony gave his fiance a substantial diamond as an engagement ring, she got the ring, he got her, everyone was happy. UNTIL the IRS got involved. Seems that Tony was MORE than 35 years older than his fiance. This triggered the Generation Skipping Transfer Tax and Old Tony had to pay taxes on the value of the ring.
Its also worth noting that the legal concept of Transferee Liability can attach in various situations. Transferee Liability is when the liability attaches to the gift and the tax liability follows it. So if you owe the IRS $50K and you give me your last asset, a $100K Silver Shadow, for Christmas. The IRS can legally take the car from me to satisfy your tax bill.
One of my closest friends has a saying "it ain't always pretty, but the truth is always the truth!" You can try to argue your way out of it as much as you like, but there are good and valid reasons to maintain records of all transactions - and the more substantial the transaction the more important it is to have a record of what happened.
Gene E. Utterback, EA, RFC, ABA

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What would you advise if a similar situation arose today? (Assume it's early in the proces, he's about to buy the ring so he can implement your advice prior to doing anything with tax consequences.)
Would it work if he _lent_ her the ring to wear, and didn't _give_ it to her until after they were married?
Seth
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On Jun 17, 1:00pm, "Gene E. Utterback, EA, RFC, ABA"

The check image from when you cashed the check will show that it came from her bank account. But if it was cash, then there is no way.
Of course, we're assuming that people are depositing the cash they receive. The following is illegal but I heard it happens: they could keep the cash and spend it slowly, or maybe if they're on vacation they could go spend the money on side trips, and it would be difficult for the IRS to catch them. Even if you could get away with it it's not always a good idea because putting the cash in a bank or securities account will allow it to grow faster.

This sounds strange. So say you plan to get married and give your fiancee a 20k ring (which many people in fact do). Are you saying gift tax is due on this 20k-13k=7k. There are 3 scenarios: you eventually get married, you break up the marriage and the fiancee returns the ring, you break up the marriage and the fiancee keeps the ring. And there is another scenario: you eventually get married but both spouses are same gender.
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On 6/18/10 12:20 PM, snipped-for-privacy@yahoo.com wrote:

An engagement ring is exempt from the gift tax so long as the marriage occurs. If it doesn't, the ring must be returned or claimed as a gift. I imagine, but don't know for sure that a legal same sex marriage would enjoy the same gift rules. Joe
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Since we're talking about the FEDERAL gift tax, the DOMA says there is no such thing as a same sex marriage.
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Don EA in Upstate NY

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But the issue here isn't marriage, it's whether a completed gift is made. A gift in contemplation of marriage (e.g. engagement ring) is not a true gift, but one contingent on the marriage taking place.
Whether it's same sex couples of heterosexual couples, the principle is the same - has there been a completed gift? It has nothing to do with the DOMA.
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On 6/19/10 12:05 PM, Stuart A. Bronstein wrote:

That may be but Don's point (correcting me) was that a same sex couple doesn't enjoy the unlimited gift exclusion the different sex couple would, and therefore, once married and the gift completed, they may have paperwork to file that others might not.
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Yes, until (or unless) the DOMA is overturned, that is certainly true if the gift causes cumulative annual gifts to exceed the exemption amount.
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Stu
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