'Millionaire' gifts and taxes

The latest reality television show is the British import "Secret Millionaire."

Each week, or as long as ratings allow, donors worth millions of dollars will go undercover into one of the most impoverished areas of the country. They spend one week canvassing the town, meeting as many people as possible and learning the residents' stories and dreams. Then the millionaire reveal their real identities and motives and hand over a check.

On Wednesday's Fox-TV premier, Todd and Gwen Graves of Baton Rouge, La., visited folks still struggling to recover from Hurricane Katrina. By the end of the program, they had given away three $100,000 checks.

I caught the last half of the program and I admit it got to me.

Maybe it was because I watched alone in a hotel room (I'm in the Washington, D.C., for a meeting of the Taxpayer Advocacy Panel) or maybe it was because Katrina was so horrific and the recovery so slow that the tragedy of so many affected areas remain. Whatever, I am glad that people who have plenty of money are committed to helping at least a few folks who don't have nearly enough.

Tax consequences of TV gifts: Such programming is not new. Other reality shows in which individuals were helped by benefactors didn't always work out so well.

"Extreme Makeover: Home Edition," for example, has for years provided families with new residences. But those properties come with expenses such as annual real estate taxes, which some upgraded homeowners had difficulty paying.

The real estate downturn also forced "Makeover" producers this season to face other economic realities.

As for "Secret Millionaire," taxes shouldn’t be a problem, at least for the recipients of the millionaires' generosity. A gift is not taxable to the receiving person.

However, the millionaires better have their tax planners on speed dial. The donor is generally responsible for paying the gift tax.

And while the money given out in Wednesday night's premiere was to people who definitely were doing good things for others, the millionaires' gifts are not deductible. Only donations to qualified charitable organizations, not individuals no matter how noble their deeds, can be itemized on your tax return.

Adding up annual gift exclusions: The philanthropic millionaires do get a bit of a break. Tax law allows individuals to give away a certain amount of money each year with no tax consequences.

For 2008, you can give up to $12,000 to another person; it can be anyone, not just a relative as is sometimes mistakenly thought. If you're married, your spouse can give the same amount.  The gift tax exclusion is periodically indexed for inflation. In a few weeks, the 2009 limit will be $13,000.

So in the case of the couple in last night's show who received $100,000 from the millionaire couple, the Graves don't have to worry about $48,000 of that gift. It falls under the exclusion limits this way:

$12,000 to the recipient wife from Gwen
$12,000 to the recipient wife from Todd
$12,000 to the recipient husband from Gwen
$12,000 to the recipient husband from Todd

In the other $100,000 gifts to two other Louisiana men, the Graves get exclusions of $24,000 for each gift. All told, $96,000 can be excluded.

But what happens when, as last night's millionaire couple did, you exceed the gift exclusion limits?

You may have to file a federal gift tax return, Form 709 (download the form here; instructions here). Gifts in excess of the annual limit are technically taxable.

For generous couples such as the Graves, when the gift comes from community property, each spouse will have to file a Form 709. For $100,000 checks that come from a joint account, the IRS considers that $50,000 is from Gwen and $50,000 is from Todd.

Exclusions exceeding $1 million: Another amount, however, comes into play before you have to write Uncle Sam a check: $1 million.

You can give away that much if you wish over your lifetime, as long as you do so during the tax year in the allowable increments to separate recipients. When you do give more than the annual limit, it goes toward that million-dollar limit.

And it's only after you exceed $1 million in gifts beyond the annual exclusion limits that you'll owe gift tax, which could be as high as 45 percent.

As you can tell just from looking at Form 709 and its instructions, even when you don't owe taxes, you probably should hire a professional to help you complete the filing.

Of course, if you're literally sharing your wealth, you likely already have a financial and tax adviser on retainer to help you meet your IRS obligations and figure out ways to help lessen any potential tax costs.

Additional TV and tax information: Coverage of the "Secret Millionaire" can be found in the Calgary Herald, Newsday and the Wall Street Journal's Wealth Report blog.

As for gift taxes, you can find out more at this IRS FAQ page.

The Baglady also has a comprehensive post on Gift Tax 101. It was guest-written by Robert D Flach, who has his own fine tax blog at The Wandering Tax Pro.

Comments

[skbell1]

I see your point, and while it does appear that the millionaires do indeed write the checks, it could conceivably be from bank accounts set up by or reimubursed by Fox TV. However, this first episode (and I missed the opening where the show probably explained the concept) sure had the look of people wanting to use some of their own money to help others rather than folks (i.e., donors) doing so just to get on TV. Fox swears the donors are indeed wealthy and want to do this, so to me that argues for being a legitimate gift.

[David Shulman]

First, a disclaimer. I haven't seen the show. That being said, I think any argument that the recipient has received a "gift" is highly dubious.

A gift is given out of detached and disinterested generosity. See Commissioner v. Duberstein.

This is a TV reality TV show. As part of the entertainment programming, the "donor" (with who knows how much direction from producers) picks a worthy recipient to receive the money. But for the TV show, the donor would not have given the money.

The recipient is winning a TV prize, as if they were on Home Makover, and has taxable income. The donor hasn't made a gift that uses up their lifetime exlcusion.