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  • Writer's pictureCatherine Swan

4 Common Myths about Gift Taxes

April 15 was not only the deadline for filing your state and federal income tax returns, but also the deadline for filing gift tax returns via IRS Form 709.Many people are confused about the subject of gift taxes. While only two states — Connecticut and Minnesota — have state gift tax, there is federal gift tax you may need to be concerned about. Here are some common myths and truths about gift taxes:

Myth: The recipient must pay taxes on gifts.

Truth: While the gift giver may face taxes on certain gifts, the recipient usually doesn’t. There are some circumstances, however, when that will not be the case. For example, if you receive a bonus from an employer or tips, these may be subject to income tax. If you are gifted property that has appreciated in value since the giver bought it, you receive the cost basis as part of that gift. If you sell the property, you will be liable for taxes on the difference between the sale price and the cost basis (what the giver paid for it).Myth: A giver must pay tax on gifts of over $10,000 per year.

Truth: The annual gift tax exclusion rate is currently $14,000 (it increases periodically), and you can give gifts of that amount to an unlimited number of people each year without having to pay gift tax. If you give to a charity or your spouse, you can give an unlimited amount without incurring taxes. The lifetime gift tax exemption for 2015 is $5.43 million per person and your annual gifts (so long as they are under $14,000 per person) don’t count towards that amount.

Myth: Gift taxes can be avoided by loaning money at no interest and forgiving the loan.

Truth: The IRS requires that you treat a loan like a loan, not a gift. You must charge a fair market interest rate and put the terms of the loan in writing.

Myth: You can always deduct charitable contributions from your taxable income.

Truth: Charitable contributions must be made to a qualified tax-exempt charity and must be itemized. You can check the status of your charity on the IRS website with its Exempt Organizations Select Check Tool.

One of the best ways to establish a good gifting strategy for you and your loved ones is to visit us for a private Legacy Planning Session, where we can identify strategies for you to preserve your legacy of love and financial security. To schedule your private Legacy Planning Session, please email or call or 970-879-1572.

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