About Annual Gifting

Definition

A gift that qualifies for the $13,000 per person annual exclusion from federal gift taxes. Married couples can combine their annual exclusion amounts and gift $26,000 to each person, per year without incurring any gift tax liability, but any gifts split between the husband and wife must be reported to the IRS on Form 709.

Gifts made to a spouse who is a U.S. citizen are exempt from gift taxes due to the unlimited marital deduction, while gifts made to a spouse who isn't a U.S. citizen have their own annual exclusion amount - $133,000 for 2009, up from $128,000 in 2008.

The annual exclusion amount was indexed for inflation beginning in 1997 and increased from $12,000 in 2008 to $13,000 for 2009:

Recipient doesn't report income

Gifts you receive aren't considered income. It doesn't matter how large they are. You don't report them on your income tax return in any way.

There are a couple of important qualifications on this simple rule:

• True gifts. This rule applies only to true gifts. You can't avoid paying income tax by calling something a gift when it isn't. For example, a "gift" you receive in exchange for services or some other consideration isn't a gift.
• Income after gift. If you receive a gift of property that produces income, you must report any income produced after the gift. For example, if you receive stock as a gift, you must report any dividends paid on that stock after the gift.

No deduction

Some people hear that they can give an annual amount to their child "tax-free" and wonder if this means they can claim a deduction for such gifts. We'll explain about the annual exclusion amount below. For now we have to deliver the bad news that there is no deduction for gifts — except gifts to qualifying charities.

Basis and holding period

If the gift consists of property other than cash, the basis and holding period of the property will transfer over to the recipient. It's important for the recipient to know when the donor acquired the property, the cost of the property, and any other information that would affect the property's basis. Ideally, the recipient of the gift should also receive records that will provide adequate proof of these facts.

It's also necessary to know the value of the property at the time of the gift. The donor needs this information to determine whether the gift exceeds the annual exclusion amount and, if so, the amount to report on the gift tax return. The recipient of the gift may also need this information to determine whether a deduction is available if the property is later sold at a loss.

Gift tax

Although there's no income tax on gifts, there is such a thing as a gift tax. The gift tax is imposed on the donor. The person receiving the gift does not have to pay this tax.

Most people don't have to worry about this tax because it generally doesn't apply until you make gifts exceeding annual exclusion amount to one person within a single year. And there are other exclusions that often prevent the gift tax from applying. There is an unlimited exclusion for gifts to your spouse. (An annual limit applies if your spouse is not a U.S. citizen.) And there's an unlimited exclusion for the payment of medical expenses or educational costs, provided you make these payments directly to the service provider or educational institution.

The Annual Exclusion

The annual exclusion is adjusted for inflation and applies to each person every year. The amount is $13,000 as of 2009.

Example: On December 31 you give $10,000 to your son and $10,000 to your son's wife. On January 1 (the next day) you give another $10,000 to your son and another $10,000 to your son's wife. If you made no other gifts to your son or his wife during these two years, all of the gifts are covered by the annual exclusion.

If you're married, your spouse can also make the gifts described in the example. You and your spouse each have your own annual exclusion amount, even if you file joint federal income tax returns.

Giving more than the Annual Exclusion amount

If you give more than the annual exclusion amount to one person in a single year you'll have to file a gift tax return. But you still won't have to pay gift tax unless you gave given a very large amount. The rules let you give a substantial amount during your lifetime without ever paying a gift tax. As of 2009 the amount is $1,000,000.

You don't use up any of this amount until your gifts to one person in one year exceed the annual exclusion amount. For example, if you make a $14,000 gift in 2009, you have used up only $1,000 of your lifetime limit.