Gifts

The annual exclusion for gifts remains at $14,000 for 2014.

Contributions to your grandson's tuition directly does not reduce the annual gift tax exclusion of $14,000 ($13,000 in 2012). The gift tax exclusion for paying another's tuition or medical expenses directly is unlimited.

Generally, the basis to the donee is the same as in the hands of the donor at the date of the gift.
To figure the basis of property you get as a gift, you must know its adjusted basis to the donor just before it was given to you. You also must know its fair market value (FMV) at the time it was given to you and any gift tax paid on it.
The basis to determine if there is a loss on the sale of a gift is the value as in the hands of the donor at the date of the gift or the fair market value Whichever is lower.
There is no gain or loss on a sale of a gift when the selling price is less than the basis for the gain and more than the basis for the loss calculation.
The basis of property received is increased by the amount of gift tax attributable to the net appreciation in value of the gift.
The net appreciation is the amount by which the fair market value of the gift exceeds the donor's adjusted basis immediately before the date of the gift.

A gift tax return must be filed on IRS Form 709 for any gift given an individual other than your spouse if the gift exceeds $14,000 ($13,000 in 2012).
A return does not have to be filed for gifts qualifying for the medical expenses or tuition exclusions.

The Gift tax return, Form 709 is due to be filed by April 15th of the year following the year of the gift. Extension forms may be filied if needed.

The gift tax is a tax that the IRS will levy if the gifts you give to people are above a certain base dollar value. Your spouse can also make a gift of $14,000 to the same person free of tax. Amounts in excess of the $14,000/ 28,000 base amounts will cause a gift tax return to be filed.
. As a general rule, a gift is only taxable if its value, when added to the value of your estate, exceeds $5,000,000 for current year and in 2012.

The first $14,000 ($13,000 in 2012) are tax free. The taxes start at 18% and increase to 35%.
The person who makes the gift known as the donor is responsible for paying taxes on the gift on excess of the current years allowance.
If the donor does not pay the tax, the recipient must. If the recipient cannot or does not pay the tax, the IRS can seize the property and sell it to pay the tax.
Gifts are taxed at the same rate as estates.

A useful way of funding college costs is to set up a IRS Section 2503(b) trust. Parents can each contribute $14,000 or $28,000 ($13,000 or $26,000 in 2012) per year, per child to this kind of trust and still qualify for the annual gift tax exclusion.
Funds within the trust can be accumulated and principal payments delayed until college.
A 2503b)trust requires that all income be paid annually or more frequently to the beneficiaries. Principal payments can be delayed until age 21.
Income distributions can be planned by various investment strategies. Principal can often be left in trust for periods of time exceeding the child's 21st birthday.

Gifts to spouses have no limitations. There are no tax consequences.
All other gifts are subject to the annual exclusion of $13,000 per donee recipient.