Is cash gifting legal or a scam?
This reasonable question has been debated for at least the past century if not longer. Some people who are involved in specific gifting activities have done so in a way that has crossed the line with different United States regulatory agencies. On the other hand, there are those people who have been gifting money throughout history and have not had any issues with any regulatory organizations. These agencies range from federal, state and local levels. They help regulate any and all types of businesses and programs including cash gifting.
So why do some have issues when gifting while others continue to keep on gifting?
Specific agencies monitor certain activities in their different arenas. Within the combination of all these agencies, their codes, laws, guidelines and rules specifically state the correct and incorrect methods of gifting to others. There are two major areas that people go wrong when they gift incorrectly:
1. Taxation Guidelines.
The Gift Tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of income from property, without except to receive something of equal value in return.
The Internal Revenue Service on the federal level sets the bar for many of the other state and local levels as far as gift and estate taxation. The following are documents, codes, rules, guidelines and laws which set federal parameters for gift taxation.
Publication 950 – Introduction to Estate and Gift Taxes
http://www.irs.gov/pub/irs-pdf/p950.pdf
Instructions for Form 709
http://www.irs.gov/pub/irs-pdf/i709.pdf
IRS Tax Code, Title 26, Sections 2501-2504; 2511.
http://uscode.house.gov/download/pls/26C12.txt
Out of these three websites and documents, this is a summary or major punch list of the rules for not subject to the IRS Gift Tax Codes:
Annual Exclusions:
A. You can generally give up to $12,000 each to any number of individuals of people and none of the gifts will be taxable
B. Both you and your spouse can separately give up to $12,000 to the same person without making a taxable gift
C. Gift splitting allows married couples to give up to $24,000 to a person without making a taxable gift
D. For Gifts made to spouses who are not US Citizens, the annual exclusion has increased to $125,000
Transfers:
A. Transfer payment to Political Organization
B. Transfer payment to and individual for Education Organization
C. Transfer payment on behalf of an individual to a person or institution for Education Organization
Other Rules:
A. If the only gifts you made during the year are deductible as gifts to charities, you do not need to file a return as long as you transferred your entire interest in the property to qualifying charities.
B. Certain gifts, called future gifts, are not subject to the $12,000 annual exclusion and you must file Form 709 even if the gift was under $12,000
C. A husband and wife may not file a joint gift tax return.
D. If a gift is community property, it is considered made one-half by each spouse.
E. Only individuals are required to file gift tax returns.
Gift Receiver
No tax payable by the person receives your gift or your estate will not have to pay any federal gift tax or estate tax because of it. Also, that person will not have to pay income tax on the value of the gift or the inheritance received.
These three websites and documents do not contain any information about state and local taxes. That information should be available from your local taxing authorities, so check with your State Department of Revenue to see if there are any additional conditions they might have outside of the Federal Gift Tax Codes in order to ensure that you are legitimately cash gifting.
2. Lack of Compliance; Pyramid Scheme; Ponzi Scam
The FTC and State Attorney Generals monitor any illegal activities.
http://www.ftc.gov/speeches/other/dvimf16.shtm
Pyramid Scheme - They promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public.
Ponzi Scam - In a Ponzi scheme the promoter generally has no product to sell and pays no commission to investors who recruit new “members.” Instead, the promoter collects payments from a stream of people, promising them all the same high rate of return on a short-term investment. In the typical Ponzi scheme, there is no real investment opportunity, and the promoter just uses the money from new recruits to pay obligations owed to longer-standing members of the program.
Make sure that if you are going to gift to someone that you don’t get involved with anything like the two types of programs above. Keep your gift between you and your person you are gifting. Don’t fall prey to these types of programs, you can get into a lot of legal trouble.
So, is gifting money legal or illegal?
Obviously gifting money is legal or they wouldn’t have tax codes to regulate it. As long as the donor and donee stays within the rules, codes and laws of these regulatory agencies, yes, it is legal. So, if you are going to participate in any type of gifting to others or receiving any gifting from others, please make sure that you stay with in the parameters of these agencies and if you are legitimately cash gifting.
The information present in this article has been taken directly from these various regulatory agencies. Do your home work, and if it makes you feel comfortable, ask your attorney and/or accountant to answer any questions.
Copyright © 2008. Troy Zollars. All rights reserved.
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