ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, March 4, 1996 TAG: 9603060007
SECTION: MONEY PAGE PAGE: 6 EDITION: METRO
COLUMN: Tax Questions
Q: If we received $10,000 as a gift, do we have to report that on our income tax this year as income, earnings or a gift? Is it taxable income?
A: No, no and no.
Generally, the donor - the person giving the gift - has an annual exclusion of $10,000 a year for each donee, or person receiving the gift. Therefore, annual gifts of $10,000 by the same donor to the same donee may be repeated with no tax liability to either party. In fact, a husband and wife can give up to $20,000 jointly without any taxes due from the donor or donee.
This gift-splitting technique can reduce an estate by $2 million if 10 gifts are given to 10 donees over 10 years. The gift can be made to a friend or relative except for a spouse.
If the amount given is over $10,000, the donor must file a Form 709 (United States Gift and Generation-Skipping Transfer) Tax Return by April 15 of the year following the calendar year when the gift was made.
The annual exclusion of $10,000 is limited to gifts of present interest. Present interest is an unrestricted right to the immediate use, possession or enjoyment of property or income from the property (i.e., cash).
When a gift tax return is required, each taxpayer has a unified credit of $192,800 - equivalent to an exemption of $600,000, which is first used to offset gift taxes and then estate taxes.
As a planning point, there is also an exclusion for voluntary payments (by a donor) that qualify for medical and educational exclusions.
Thus, an annual gift of $10,000 to the donee, medical bills of $10,000 paid to the health care provider, and $10,000 paid to the educational institution on the donee's behalf can be paid without incurring any taxes.
Also, it is interesting to note that gifts to political organizations are not subject to any gift taxes.
- Answered by Charles F. Equi Jr. of Budd, Ammen & Co.
Q: I'm divorced and buying my own home. I can't file my taxes as head of my household. My former husband took total disability, and he can file as head of his household. His second spouse works full time. I also work full time. How can he not work and still claim head of his household? This seems so unfair. I receive $375 per month alimony.
A: From the question, it appears that there is some misunderstanding about the meaning of the "head of household" filing status. It is not a filing status for persons buying a home. It is a filing status for persons who are unmarried (or considered unmarried) on the last day of the year and paid more than half the cost of keeping up a home for themselves and a qualifying person for more than half the year.
A portion of the benefits that the more favorable tax rates bestow upon a married couple filing a joint return are given to an unmarried individual who qualifies as the "head of household."
For the purpose of "head of household" filing status, you are considered unmarried on the last day of the tax year if you meet all of the following tests:
* You file a separate return.
* You paid more than half the cost of keeping up your home for the year.
* Your spouse did not live in your home during the last six months of the year (other than for temporary absences).
* Your home was, for more than half the year, the main home of your child, stepchild, adopted child, foster child or other relative. Generally, this person must be your dependent. However, there are certain exceptions to that requirement. In addition, in the case of dependent parents, there is an exception to the requirement that they live with you.
- Answered by James B. Taney of Anderson & Reed
Tax-related questions from our readers are answered by members of the Roanoke chapter of the Virginia Society of Certified Public Accountants. This feature runs every Monday on the Money Page through April 8. Please send your questions to Tax Questions, The Roanoke Times, P.O. Box 2491, Roanoke, Va. 24010. Roanoke, Va. 24010
LENGTH: Medium: 75 linesby CNB