IRS Taxes on Gifts
The IRS taxes certain types of gifts. Some types of gifts cannot be taxed no matter how much you give, while others are subject to an annual exclusion. If the exclusion is exceeded, you will have to file a gift tax return. If you donate to a qualified nonprofit organization, gift tax will not apply, and you might even be able to deduct the value of the gift from your taxable income.
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Taxable Gifts
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To be taxed, a gift must fall within the IRS definition of "gift" for tax purposes. The motivation for the gift must be generosity, admiration or charity, as determined by surrounding circumstances. Even a sale can be classified as a gift if something is sold for less than its market value. The value of the "gift" in such cases is the market value of the goods minus the price paid in return.
Limitations
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An annual exclusion of $13,000 per recipient applies to gifts -- you can only be taxed on amounts beyond the exclusion. A couple can gift up to $26,000 per year to any one recipient. You can give as much as you want to your spouse without being taxed, unless she is a non-resident alien, in which case the exclusion is $134,000 (as of 2011) Gifts of tuition or medical expenses, as well as political contributions, are not taxable. Even if you gift beyond your exclusions, you may apply a lifetime $345,800 tax credit to eliminate your gift tax liability. As a result of the exclusions and the tax credit, you may gift over $1,000,000 in your lifetime without incurring gift tax liability.
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The Gift Tax Return
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If you incur gift tax, or need to rely on the lifetime tax credit to avoid paying gift tax, you must file a gift tax return, Form 709, in addition to your 1040 tax return. Gifts are taxed at a graduated rate -- the lowest rate is 18 percent, and the highest rate is 45 percent (as of 2011).
Charitable Gifting
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You may donate as much as you like to a non-profit organization established for literary, artistic, religious, charitable or educational purposes, as long as it is tax-exempt under Section 501(c) of the Internal Revenue Code. You may also deduct the value of these donations from your taxable income. The deduction limit varies between 30 percent and 50 percent of your adjusted gross income, depending on the type of organization.
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References
- Photo Credit gift image by Sergey Goruppa from Fotolia.com
