Archive for December, 2013|Monthly archive page

Gifts Given and Received – Taxable?

Originally published in the Cedar Street Times

December 27, 2013

I remember when I was growing up, every year for Christmas, my grandfather would send a check to my brother and I for $75 each.  That seemed like an incredible amount of money to me at the time, and it really boosted my treasury each year!  One of those years, I can remember going to the bank with my mom to cash the check, and wanting to see what $75 felt like in my own two hands; I asked the teller to give it to me…all in ones.  She smiled, pulled some crisp ones from under her drawer, and counted them out for me.  I had never felt a wad of bills like that in my hands!  I tried folding them over, but I could not get them all in my pocket it was so thick, so I put them in lengthwise, and they just about stuck out the top of my pants pocket – I was a rich man!

After a week or so, we came back and deposited about half of them back into my bank account.  My dad had always encouraged us to save half of whatever we received or earned when we were growing up.  I admit, that ratio did not quite remain when I got into high school, and discovered a new and expensive hobby called, girls, but saving was ingrained in me.  When I left for college I had a measurable chunk of change in my bank account.

Throughout those years, it never occurred to me to wonder about the tax implications of the gifts I received.  Now, however, I think a lot about those things!

I do not know anyone that would hesitate to put a gift of $75 into his or her bank account.  But if you throw two or three zeroes on the end, then I definitely get questions from people wondering if it they will have to pay tax.  As the recipient of a gift, whether it is $75 or $75 million dollars, you do not have to pay taxes or report the receipt of the gift (with one exception that I can think of to be explained later).  If you receive something other than cash, such as stocks, real estate, or tangible property, you could have tax if you sell it.  The catch is that when you receive noncash gifts, you also receive the giftor’s cost basis, and when you sell you have taxable gain on the difference between the sales price and the cost basis.  For example, if someone gives you a share of stock worth $100, and that person bought it for only $10, you have to pay tax on the $90 gain if you sell it.

If you put yourself in the shoes of the person giving the gift, there are different rules you need to follow.  As long as you give less than $14,000 (2013 and 2014) a year in combined cash or noncash items to any one person, you have nothing to worry about, except providing the person evidence of your cost basis if the items are noncash items.  (You are doing a disservice if you do not provide proof of cost basis, since the person you give the noncash items to could potentially be held liable for tax on the entire amount of the gift if they sell it, and cannot prove your cost basis – this is often overlooked.)  You could give $14,000 to every person on earth each year and not have to file a gift tax return.

If you give $14,001 to just one person, then you have to file a Form 709 United States Gift Tax Return.  The portion in excess of $14,000 per person is then subtracted from your combined gift and estate tax exemption (currently $5.25 million and indexed for inflation).  For most people this is just an informational filing as they will never reach the limits, but it is required (and limits have gone up and down in the past).  If you exceed the limits, however, the person giving the gift has a tax liability at a rate as a high as 40 percent.  The only possible time I can think of that the IRS could pursue the recipient of a gift for taxes would be if the giftor gave away so much money that he or she had a tax liability and could not pay it.  The IRS in that case, could pursue the person receiving a gift for tax.

Keep in mind that a gift is different from inheriting when someone passes away.  You generally do not have tax on inherited amounts either, with the exception of tax liability on any earnings the assets you are entitled to accumulate between the date of the peron’s passing, and the date you receive the property.  Your cost basis with inherited assets is also generally more favorable as the cost basis you receive is typically the fair market value at the date the person passed away, and not their old, often lower, cost basis.

Crafty minds will sometimes think of schemes to call income a gift since gifts are not taxable.  Be careful of this – substance over form will rule the day.  Yes, it would be nice if I would do your tax preparation for free, and you also happen to be kind enough to give me money, but it ain’t gonna fly!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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Health Insurance Tax Credit for 2014

Originally published in the Cedar Street Times

December 13, 2013

You have probably heard that there is a possible tax credit for the new health insurance requirement that takes effect January 1, 2014.  If you have health insurance available through your employer that does not exceed 9.5% of your household income (for your single coverage alone, exclusive of your family), or you have certain government plans like Medicare or Medicaid, you are not eligible for the credit.  For others that can go through Covered California, our state health insurance exchange, your income will determine your eligibility.  It is important to know the income thresholds for your family size because the poorly designed structure of the credit could mean the complete loss of the credit if you are even $1 over the threshold.

For instance, a family of four which includes a mother and father age 45 and two children in high school with total household income of $94,199 (using 2013 figures) in Pacific Grove, California, would qualify for a $629 per month tax credit, or $7,548 for the year.  If they made $1 more of income, $94,200, they would receive absolutely nothing.  This being the case, they would be better off taking an extra three or four weeks of unpaid time off from work, just to be able to qualify for the credit!

The credit is available to households making as much as four times the federal poverty line.  If you make under the poverty line you are not eligible for the credit, but eligible for Medicaid (MediCal in California) instead.  If you make between 100% and 400% of the federal poverty line, the credit is determined on a nice sliding scale based on your income, age, zip code, and family size.  The problem is that there is a cliff once you get over 400% that makes you completely ineligible for the credit.  The 2014 poverty line figures are not yet released, but can be found at http://aspe.hhs.gov/poverty/figures-fed-reg.cfm when available.

Using 2013 information, the critical thresholds at 400% are as follows based on the number of members in the family: one family member – $45,960, two family members – $62,040, three family members – $78,120, four family members – $94,200, five family members – $110,280, and adding $16,080 for each additional family member.  California residents can visit https://www.coveredca.com/shopandcompare and enter in their family size, age of adults, zip code, and expected household income to determine the tax credit and premium options for the state healthcare exchange very easily.

The family size includes you, your spouse, and your dependents (whether or not actually related).  Household income includes the income for you and your spouse (if married, you must file a joint return to get the credit), as well as any income of dependents IF those dependents had a filing requirement ($6,200 of earned income or $1,000 of unearned income in 2014).  Although there is not a lot of clear guidance by the IRS at this point, it appears if they are under the filing requirement, none of their income is counted (this is another cliff!).  This means you would need to make sure your dependents do not make over these amounts if it would push you over the threshold.  More specifically the income included for you and your dependents is your adjusted gross income modified to include any tax-exempt income, nontaxed Social Security benefits, and any foreign earned income excluded.

Based on your 2012 income, you may be eligible to receive advance payments on your credit.  However, this will be reconciled on your 2014 tax return, and you will either have additional funds paid to you, or worse, have to pay back (subject to a cap) some or even all of the credit if it turns out you were ineligible based on your actual income in 2014.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.