Sunday, January 17, 2010

Do I have to Pay Gift Tax on Gifts that I Give?

Generally, the current gift tax rules allow you to make a gift of $13,000 per year to any individual without gift tax consequences. There is no limit on the number of people to whom you can give; you can give $13,000 per year to as many people as you want without gift tax consequences. And, you can give unlimited gifts to a spouse.

There is no dollar limit on the amount you may pay on an individual's behalf if you pay the money directly to a school for tuition or to a health care provider for certain medical costs. As long as the payments are made directly to the institution, the $13,000 annual limit will not apply.

The exclusion does not apply to books, supplies, and fees or other expenses that are not direct tuition costs, or for medical costs that do not qualify as deductions for income tax purposes.

Spouses can split their gifts so that a gift made by one is treated as being made one half by each. As a result, a married couple can give $26,000 a year to any one individual without incurring any gift tax consequences. The funds can come from one spouse's assets, as long as the couple agrees to split the gift.

So what are the ‘gift tax consequences”? If you make a gift to any one individual of more than $13,000 ($26,000 for a married couple), you will have to file a gift tax return. However, under the unified gift and estate tax rules, you may still not owe any gift tax. Under those rules, every person is entitled to a combined lifetime exemption for gift and estate tax purposes. This exemption allows an individual to gift $1,000,000 of assets without paying any gift tax.

However, even if no tax is due, a gift tax return must be filed for any gifts above the annual exclusion limit.

There is no limit to the amount that you can give to charity; however, your tax deduction may be limited. Income tax deductions for charitable contributions not allowed in one tax year may be carried over to the next tax year.

Note, however, that the gift and estate tax rules are in the process of change: what is true for 2009 and 2010 may not be true for 2011.

And, as I wrote in the previous post, there are no income tax consequences to the recipient of the gift.