IRS Guidelines for Personal Gifts
In the United States, the Internal Revenue Service (IRS) allows taxpayers to make annual gift transfers without incurring gift taxes. However, the IRS seeks to ensure that large gift transfers are not simply a method of avoiding estate tax. As a result, taxpayers face both annual and lifetime limits on the value of gifts they may transfer free of tax.
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Function
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Each year, the Internal Revenue Code allows taxpayers to make tax-free gift transfers of up to $13,000 per recipient. There is no limit as to the number of gift recipients. For married couples, this limit may be increased to $26,000 per recipient. Both values are indexed to the Consumer Price Index for inflation and are periodically increased in $1,000 increments, usually after several years.
Features
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Gifts may be given either in cash or in the form of property. In general, gifts of property attract significantly more scrutiny from the IRS, since it is more difficult to determine the value of these gifts. Gifts must reflect fair market value, or the price for which the gift would change hands between a willing third-party buyer and seller. In instances where fair market value is not readily determinable, the IRS may require a formal appraisal.
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Charitable Gifts
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There is no limit on the amount a taxpayer may gift to a qualified charitable organization. The IRS determines which groups qualify for such a designation. Such gifts also qualify to be claimed as an itemized deduction on the taxpayer's individual income tax return for the year in which the gift is made. The deduction granted may be limited by the taxpayer's income and generally may not exceed 50 percent of the taxpayer's adjusted gross income.
Unified Credit
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The IRS allows each taxpayer a lifetime exemption against gift taxes in the amount of $345,800. This is known as the "unified credit" and is generally equivalent to the amount of tax due on the first $1 million of taxable gifts. As such, the first $1 million of taxable gifts for a taxpayer are effectively excluded from gift tax. This exclusion is increased to $2 million for couples.
Exceptions
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You are typically required to file a gift tax return with the IRS only when you exceed to amount of your annual tax free exemption of $13,000. Some gifts, however, are excluded from tax. Most commonly, taxpayers are allowed unlimited lifetime transfers to a spouse. In addition, exceptions apply for payments of both educational costs and medical expenses, typically provided the payments are made directly to the institutions.
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