Making a significant cash gift to someone is a generous move, but it may have serious tax implications for the giver. That's because the IRS has specific regulations regarding gifts of money or property. Before you make a financial gift to a friend or family member, it's important to understand how doing so could impact you at tax time.
The federal gift tax applies only to transactions that meet the definition of a gift. In the broadest sense, the IRS considers any transfer of money or property to someone else to be a gift if the giver doesn't receive anything in return. There are, however, some exclusions as to what qualifies as a gift. These include gifts made to your spouse, gifts made to qualifying charities and gifts or donations made to political organizations. Only gifts made as charitable donations can be deducted on your taxes.
Gift Tax Exclusions
A gift is only considered taxable if it exceeds the annual exclusion limits. For the 2011 tax year, the exclusion on individual gifts was $13,000 for single filers and $26,000 for couples. This means you can gift up to the exclusion limit to as many people as you want in a single year and not incur any gift tax. Generally, the person giving the gift is responsible for paying any gift taxes that are due. If you receive a gift of money or property, you can opt to assume responsibility for the gift tax. This can be complicated, but a qualified tax professional can assist you with filing the necessary paperwork.
Married couples can maximize their cash gifts and minimize their tax liability by splitting gifts. The IRS rules allow couples to give to any one person up to $26,000 per year, but this doesn't mean that each spouse has to give an equal share. For example, if you give your son $10,000 and your wife gives him $16,000, you can avoid paying gift taxes if you agree to split the gift when you file. If you want to give your child and his spouse money as a wedding gift, the split gifting rule allows you to give each of them $26,000 -- for a total of $52,000 in a single year -- without paying gift tax.
Lifetime Gift Exemption
As of 2012, the IRS allows you to gift up to $5,120,000 over the course of your lifetime without paying any gift tax. This means that technically, you don't have to pay taxes on any gifts that exceed the annual exclusion limit until you reach the $5.12 million cap. For example, if you give someone a gift of $20,000, the first $13,000 is not taxable. The remaining $7,000 is considered to be taxable, but the tax only applies if your total gifts exceed the lifetime limit. However, your available lifetime exemption is reduced by any gift amounts that exceed the yearly limit.
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