Income tax vs. gift tax - dependants as donees.

• Author: Grace, John F.

Most CPAs are aware of the income tax rules governing the claiming of a personal exemption for a dependent. But are they also aware that the same support payments that determine who claims the personal expemption can, in some cases, be classified as taxable gifts?

Personal exemptions

The Code and Treasury regulations have identified five tests that must be met before an exemption for a dependent is allowed. (As is typical with the income tax laws, there are exceptions to the general rules; however, they are too numerous to cover here.) If all five tests are satisfied, the taxpayer may claim the person as a dependent. 1. The dependent's gross income must be less than the exemption amount ($2,350 for 1993) for the calendar year, unless the dependent is the taxpayer's child and is either under age 19 or a full-time student under age 24. 2. The taxpayer must provide over half the dependent's total support for the calendar year. There are exceptions for multiple support agreements and children of divorced parents. 3. The dependent and the taxpayer must meet one of the defined relationships: * Child, stepchild, adopted child or grandchild. * Brother or sister. * Half-brother or half-sister. * Stepbrother or stepsister. * Mother or father or ancestor of either. * Stepmother or stepfather. * Niece or nephew. * Aunt or uncle. * One of various in-laws. * A member of the taxpayer's household for the entire tax year. 4. The dependent cannot have filed a joint return with his spouse. 5. The dependent must generally be a citizen, national or resident of the United States.

Gifts

A gift is a voluntary transfer of property by one person to another without consideration or compensation. A gift generally requires three elements: (1) the intention on the donor's part to make the gift, (2) the delivery by the donor of the subject matter of the gift and (3) the acceptance of the gift by the donee. The IRS attempted to remove the requirement of donative intent by classifying the transfer of property for less than adequate and full consideration as a gift to the extent the value of the property exceeds the value of the consideration. Case law, however, has generally provided that all three elements of a gift, including the intent to make a gift, must be present.

When support is provided to a dependent, the issue arises as to whether or not the taxpayer has made a gift to the dependent under the gift tax laws. For example, a taxpayer may claim an adult brother or...