About the Income Tax Personal Gift Deduction Rule
If you give people gifts of property or money, the IRS wants to know about it. As the donor of the gift, you typically are expected to pay the gift tax, but the IRS holds the recipient responsible for paying it in certain circumstances.
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Gift Tax
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The gift tax must be paid on property (including cash) that is given without compensation or for compensation that is less than the property's market value. Not only does this include giving property or money, but it also includes granting the use or income from a property without getting back something of equal value. According to the IRS, "If you sell something for less than its full value or you make an interest-free or reduced-interest loan, you may be making a gift."
Fair Market Value
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The value of the gift is determined by the property's fair market value. The fair market value is the price at which the property could sell for between a willing buyer and seller, both with a knowledge of the relevant facts about the property, according to the IRS. Another determinant is the price the property would sell for in a market where it is commonly sold.
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Exceptions
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There are exceptions to the gift tax. These include the following: gifts that don't exceed the annual exclusion limit for the calendar year; tuition or medical expenses your pay for someone else; gifts to your spouse; and gifts to a political organization for its use and gifts to qualifying charities.
Annual Exclusion
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In 2009, the annual exclusion was $13,000 and applied to the person receiving the gift. This means you could give each of your children $13,000 a year or you and your spouse could give each of your children $26,000 a year ($13,000 from you and $13,000 from your spouse). Any amount over those limits would be subject to the gift tax.
Lifetime Credit
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While gift taxes are not deductible, they also won't necessarily affect your federal return. The IRS allows a lifetime unified tax credit of $345,800. As you make gifts during your lifetime, the gift tax comes out of this credit. This, in essence, allows for a $1 million lifetime exclusion from the gift tax. However, even if you do not have to pay the gift tax, you will have to file a Form 709 so the IRS can keep track of how much of your lifetime credit you are using.
Recipients
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The recipient of a gift must pay taxes under certain circumstances. If what is given isn't a true gift, meaning it is given in exchange for something, the IRS looks at this as a way to avoid paying income taxes and not as a gift. The second example is when the gift itself produces income, such as stocks and bonds. In this case, you don't have to report the value of the stocks and bonds, but you do have to report and dividends or stock splits you are paid after you receive the gift.
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