As of 2012, each U.S. taxpayer can give up to $13,000 tax-free, the annual exclusion amount set by the Internal Revenue Service. This limit is subject to change. For example, from 2006 through 2008, it was $12,000. The amount applies to each recipient, which means parents are allowed to give up to $13,000 for each child.
According to the IRS, certain gifts are not taxable. These include gifts that are less than the annual exclusion amount. As of 2012, a married couple can give up to $26,000 tax-free, referred to as "gift splitting." If you pay tuition or medical expenses for someone, you don't have to pay tax on the money. Gifts to your spouse are also tax-free. Finally, gifts to a political organization are nontaxable.
The IRS assesses a gift tax of up to 35 percent on any amount above the annual exclusion limit. If you give a gift worth more than the yearly threshold, you'll have to file a gift-tax return using Form 709. The donor pays the tax, but the recipient can agree to pay it.
Even if your cash gift exceeds the annual exclusion amount, it's unlikely you'll owe any gift tax, since every taxpayer receives a credit called a unified credit. As of 2012, this credit exempts up to $1,772,800 over a taxpayer's lifetime. It reduces or eliminates the gift tax and estate tax. However, you'll still have to file a gift-tax return.
Let's say you decide to give your daughter $35,000. Because you're allowed an annual exclusion amount of $13,000, only $22,000 of the amount is subject to the gift tax. The maximum taxable amount is 35 percent of $22,000, or $7,700. However, you can apply the unified credit to gift tax to eliminate your liability. Subtract the $7,700 from your unified credit of $1,772,800. The remaining credit you can use in subsequent tax years against the gift tax or estate tax is $1,765,100.
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