Suppose a relative receives a big lottery payday and wants to give you $10,000. Will you have to pay taxes on her gift? Will your relative face some tax consequences for peeling off $10,000 from her winnings? Is a tax accountant going to make a lot of money to figure this out? In most cases, the answer to all three questions is no. The tax rules on gifts — especially cash — are relatively straightforward and fairly simple.
If you’re the recipient of a gift — whether you’re a relative, friend, homeless stranger or charitable organization — you have no tax liability regardless of the amount of the gift. If there is a gift tax to be paid, it is the responsibility of the person who provided the gift.
Annual Gift Exclusion
If you are the giver — the person who provided the gift — you have an annual tax exclusion of $13,000 per gift. The best way to avoid the gift tax, therefore, is to avoid giving anyone more than $13,000 a year. However, there is no limit to the number of people to whom the giver can give $13,000 or less and still avoid taxation.
Annual Exclusion Exceptions
There is no limit to the amount parents can give to children they claim as dependents. In addition, each parent individually can donate up to the annual exclusion limit. A couple collectively can give $26,000 to one recipient. You also can give more than the exclusion limit to pay tuition or medical expenses, but the check needs to be written to the institution, not to the beneficiary. There also is no limit on gifts to political organizations.
Lifetime Gift Exclusion
If you plan to give a lot of money away and you don’t want to spread the donation over a number of years, there is an alternative. Beginning in 2010, each taxpayer received a $1 million lifetime gift exclusion, and it jumps to $5 million in 2011. Here’s an example of how it works: A grandfather wants to give $25,000 to each of his four grandchildren so they can spend time in Europe. The first $13,000 for each gift falls under the annual gift exclusion. The remaining $12,000 for each — $48,000 total — comes off his lifetime gift exclusion, leaving the grandfather $4,952,000 in tax exemptions for later gifts.
IRS Filing Requirement
If you make a taxable gift, you must file Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return. It’s due with your tax return for the year you made the gift, even if you don’t owe a gift tax because you haven’t reached your lifetime exclusion limit. The IRS will keep a running tab of your lifetime exemption, although you should keep track, too.
Any gift you make to a qualified charitable organization can be listed as an itemized deduction on your return, as long as your total charitable gifts do not exceed 50 percent of your adjusted gross income.