Annual Gift Tax Regulations: Avoid A Penalty

Before you give decide to give your entire fortune away this year, you may want to see if the annual gift tax will affect your generosity.

Why Gift Taxes Exist

The annual federal gift tax is applied to all transfers of money or property when the recipient is not expected to fully compensate the giver, if at all.  It might seem unfair that the government taxes people when they want to give their money away, but it is designed prevent people from sidestepping the estate tax. For those who die with estates worth more than $2 million, the amount that exceeds that limit will be taxed at a graduated rate up to 45 percent before the assets can be awarded to the heirs. In order to keep people from simply giving most of the wealth to their heirs before death, the government imposed a gift tax to make sure those taxes get paid somewhere along the line. Fortunately for the majority of Americans, the penalties may never apply.

The Gift Tax Rules

There are plenty of monetary presents that are legally never taxable. These include charitable contributions to qualified organizations, money paid directly to medical facilities for the medical care of someone else, tuition funds paid directly to an educational institution on behalf of another person, and gifts made to a spouse.

Neither do the taxable penalties apply to any present that is less than the yearly allowable limit, or $13,000 in 2009. This means you can give up to $13,000 to as many people as you like each year without incurring the tax. Married couples can give up to twice the annual limit, $26,000 in 2009, to any person, if they agree to split their money giving and file the appropriate IRS forms.

Additionally, each person is granted a $1 million lifetime taxable giving limit. This means that even gifts over the allowable limit may not be subjected to penalty until a total of $1 million in such presents has been given. For example, you give $20,000 to ten different people in one year. Even though the amount for each gift exceeds the current nontaxable limit by $7,000, you will not pay any taxes on your donations as long as you have not already exhausted your $1 million lifetime limit. For this year you would have simply depleted $70,000 ($7,000 multiplied by 10 donations) of your $1 million limit. You would need to file a gift tax form this year to report your money-giving, even though you would not pay any taxes on them.

Keep in mind the $1 million limit only applies to taxable presents, or those that are more than the annual allowance. You could give $13,000 each to 1,000 people in 2009 and you would not even have to file a gift tax form.

The bottom line is that while the gift tax exists for a reason, most people will never end up paying a dime on their giving habits.
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