Are You Subject To Gift Taxes?
The federal tax code has rules that could cause problems for same sex couples that are not married.
Here is the source of the problem. When someone makes a significant gift to someone they are not related to, the donor can end up owing federal taxes on the value of the gift. The rules do exclude small gifts from the federal tax. The amount of the exclusion has been increasing over the years, and currently it is set at $13,000. In other words, if someone gives a gift worth less than $13,000 no federal gift tax is owed.
California does not assess a gift tax on any gifts.
Gifts of any value are excluded from the tax when the gift is given to the spouse of the donor.
However, federal law does not exclude large gifts to domestic partners or a significant other to whom the donor is not married.
I am not an attorney or a qualified tax expert. No action should be taken based solely on the content of these memos. However, I hope the memos will help you ask the right questions of people who are qualified in these issues.
Gift taxes don’t apply just to gifts of money. According to IRS Publication 590, the tax can apply to any gift of property including money, the use of property or the right to receive income from property. Also, if you sell something for less than full value, or if you make an interest free, or reduced interest loan, you may be making a gift. And, if that gift is worth more than $13,000 the donor may owe federal gift taxes on the gift.
Here is how the problem can occur for unmarried same sex couples. Suppose two men or two women fall in love and move in together. And suppose they live in a home already owned by one member of the couple. Then, suppose the one who owns the home puts his or her partner on the deed for the home, making that partner co-owner of the home. That is a gift, and in most cases, that gift will be worth more than $13,000.
Or suppose, in time, the partners decide to make their bank accounts joint accounts. And suppose they close their individual bank accounts and put all that money in a joint account. Depending on how much one or the other of them puts in the joint account, it could trigger the federal gift tax
Even if they do not establish a joint account, if one of them is contributing significantly more to their joint living expenses, it might trigger the gift tax.
Federal law does say no tax will be owed on gifts to pay tuition or medical expenses for someone else if paid directly to an educational or medical institution. Contributions to charities and political institutions are also excluded from gift taxes.
But, if same sex couples marry legally, gifts between the spouses are not subject to the federal gift tax. Serious same sex couples who are not married should seriously consider these issues.