Cash Gifting Rules

Gift more--owe less.

One strategy to reduce taxes is to gift cash, but nothing is simple where the IRS is concerned, and gifting is no exception. When you know the rules concerning cash gifts, you can substantially reduce your tax liability and provide a tax-free benefit for family, friends or even charities. However, in order to make smart gifts, you must know the limits, what qualifies as a gift and what you can do to legally get around gift taxes.

Limits

For the 2010 tax year, you can give up to $13,000 to as many individuals as you want without incurring a tax penalty. If you have 100 friends, you can give away $1,300,000 tax-free to you and to the receivers. The $13,000 limit is unchanged from 2009, but from 1998 to 2010, the limit increased from $10,000 to $13,000. The limit is combined for married couples. You and your spouse can give a total of $26,000 ($13,000 each) to a single individual without incurring a tax.

Definition

According to IRS Pub 950, a gift is a transfer of property for which you have no expectation of anything in return. In order to qualify as a gift, you must also have no rights to the transferred property. If you give your brother stocks worth $13,000 and you stipulate that any proceeds from the sale of that stock over $13,000 is returned to you, you have not given a gift according to the IRS. A gift is not limited to cash. It can be real estate, tangible goods or any other item of value.

Non-Taxable Gifts

The gift of higher education must be paid directly to the institution.

Some gifts are not limited to the $13,000 limit. Examples of these include gifts to your spouse, provided that your spouse is an American citizen. There is no limit on how much you can give to your spouse; however, according to IRS Pub 950, you are required to file a gift tax return if you give your spouse interest in some property that will be ended by a future event. If your spouse is a citizen of a foreign country, there is a $134,000 limit on your gift in 2010. Gifts to charities are also not taxable.

You can also pay for higher education expenses as a gift, provided you pay the educational institution directly. This gift is limited to tuition and fees; books and room and board do not qualify as a non-taxable gift. However, you can still make a $13,000 cash gift, which the recipient can use for books and living expenses.

Advantages

For those with a lot of money who want to reduce their tax liability, gifting can be a viable solution. Each gift you give is a reduction in your annual income, resulting in a lower tax rate and taxable amount. The advantage to your recipient who receives your gift is that he will not be required to pay tax on the gift.

Exclusion

The gift limit only defines the amount that you are able to give without incurring a tax. It does not mean that you cannot give more if you want, and provided you don't exceed the $1,000,000 lifetime exclusion limit, you can still avoid the gift tax.

Consider, for example, that you choose to give your niece $22,000 to pay for her college education expenses one year. You give this to her rather than pay the education institution directly. In this example, $13,000 is considered a non-taxable gift under the annual gift limits, leaving $9,000 to count against your lifetime exclusion. Every dollar you pay in excess of the annual limit reduces the amount remaining in your lifetime exclusion. Following this example, your now have $991,000 left for your exclusion.

References

• TurboTax
• IRS Pub 950
• IRS Form 709