Tax Free Gift Limits And Rules For Write Offs

It is possible to give a tax free gift as long as you know the rules and limitations.

What Does the IRS consider a Gift?

In tax terms, gifts include cash or property given to another person or organization without the donor receiving compensation equal in value to the gift. Giving someone the use of property or income from a property may also be counted as a gift. Even making a loan to someone else, where little or no interest is required, can be considered a gift.

Non-Taxable Gifts 

The IRS website states that, "The general rule is that any gift is a taxable gift." However, there seem to be many exceptions to this rule. Tax free gifts include:

  • Gifts that are less than the current annual exclusion ($13,000 per gift to each individual in 2009)
  • Money or property given to a spouse
  • College tuition paid directly to the school on behalf of another person
  • Medical expenses paid directly to a medical facility for someone's care
  • Gifts to a political organization
  • Charitable contributions

Gift-Splitting

Married couples are each allowed to contribute up to the annual exclusion to a single recipient (for a total of $26,000 in 2009). For example, within the same calendar year a husband could give his golfing group a gift of $23,000 ($11,500 from both spouses) and a wife could give her nephew a gift of $19,000 ($9,500 from both spouses), as long as they file the appropriate gift-splitting 709 tax form.

Unified Credits

Even if you give gifts over the annual exclusion, you can avoid paying taxes on your gifts by applying your unified credit allotment. The unified credit allows you a credit of up to $1,000,000 against all gift taxes incurred in your life. So, say you give $34,000 to your daughter one year. You can either pay the gift taxes on the $21,000 ($34,000 minus the annual exclusion of $13,000) or you can use part of the unified credit, although this will decrease the amount available for use in future years. 

Can Gifts Be Written Off on Tax Returns?

Most gifts are not tax-deductible, but there are at least two exceptions. The first is charitable contributions made to a qualified, tax-exempt organization. These contributions can be deducted only if you file an itemized tax return, and in order to claim a deduction for any donation larger than $250, you must provide records of the gifts in the form of things like receipts and cancelled checks.

In terms of the amount you can deduct from your taxes, cash contributions can be deducted up to 50 percent of your adjusted gross income (AGI), property gifts up to 30 percent, and capital gains assets up to 20 percent of your AGI.

The other exception is for business gifts. You may deduct up to $25 for gifts given to someone for the purpose of rewarding past business or encouraging future business relationships.

While some restrictions apply, there are plenty of ways to give sizeable tax free gifts to your family and friends, as long as you to stick to the annual IRS gift limit amounts.

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