Federal Taxes on Gifts
Gifting can be a way to provide for family members and close friends. It may reduce taxable income for the giver and is often considered a valuable tool in estate and retirement planning. It is important to understand the federal tax rules for gifts to ensure the best benefit for the giver.
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Definition of a Gift
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The IRS defines a gift as a transfer of goods (including money) in which the giver (donor) does not expect to receive full compensation in return. Traditionally we think of gifts as items offered to another person for free, as when you give a friend a sweater for her birthday. The IRS also states a gift is given if you sell an item for a price well below its fair market value or provide someone a no-interest loan.
Exclusions
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Donations to qualified charitable organizations are not considered gifts for tax purposes nor are contributions to political organizations. You may assist someone with medical or educational expenses and it is not viewed as a gift. Transfers of property between married persons are not gifts.
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Taxes
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The IRS taxes the gift giver, or donor, for gifts given to any single person or entity that exceeds the annual exclusion. In 2010, the gift tax exclusion was $13,000. This means you could give any number of individuals separate gifts totaling $13,000 without paying tax. The value of a gift is calculated using the Fair Market Value, or what the item would be worth if you were to sell it on the open market. You may need an appraisal to determine this value.
If you are married, both you and your spouse may give up to the exclusion cutoff before the gift tax becomes effective. This means that together, in 2010, you could give $26,000 to each person.
Gift Tax Return
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Amounts over and above the exclusion cutoff will be taxed at a predetermined rate. You will need to file IRS Form 709 if you give gifts with a fair market value that is greater than the annual exclusion.
The first section of the form will verify that you do indeed need to file a Form 709. It will also aid in deciding whether you and your spouse will split any gifts. Couples will each need to file separate forms.
As of 2010, the IRS allows you to exempt $1 million of gifts over the course of your lifetime. You can allocate this exemption all at once or over time, depending on your needs. Form 709 will ask you which gifts you'd like to exclude, if any, and how much of each gift.
Unlike charitable contributions, you cannot deduct the value of gifts from your tax return.
Considerations
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The gift tax exclusion cutoff and tax rates can vary from year to year. It is important to verify the regulations prior to gifting to avoid costly errors. As giving can play an important roll in your estate planning, you may want to consider consulting an estate or elder law attorney to help with your planning.
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