Gift Tax Basics

• Under the federal tax code, taxpayers who make monetary gifts are usually responsible for paying the federal gift taxes. The IRS allows taxpayers who transfer cash or property as gifts to exclude limited gifts to provide them with an exception to the general rule that gifts are taxable to avoid gift tax liabilities. To determine whether the transfer is actually a gift and not a loan, the IRS uses special gift tax rules and requires gift donors have an intent to transfer property unconditionally and without expecting a gift in return or repayment.
  
  

Excludable Gifts

• Whether a $10,000 monetary gift is taxable depends on the specifics of the gift transfer and the donee. Taxpayers do not have to pay gift taxes on property or cash transferred for tuition or medical expenses, for gifts to political organizations and gifts to the taxpayer's spouse, regardless of the amount of the gift. Taxpayers who provide gifts to other individuals or for other purposes, can determine their individual tax liabilities using the IRS rules for exclusionary gifts under the current (as of Feb. 2011) tax year.
  
  

Exclusionary Limits

• As of January 1, 2009, the IRS raised its previous gift exclusion allowances and now allows taxpayers to exclude up to $13,000 in gifts to each donee. The exclusionary limit applies to individual transfers. For instance, Bob cannot give Susan a gift of $5,000 and $10,000 and exclude both of the gifts because of each gift did not exceed the $13,000 limit. However, Bob may give Susan $13,000 and avoid paying taxes on the gift. Additionally, Bob may give Susan, Joe and Jane each $13,000 and avoid gift taxes on all three gifts. Taxpayers can take advantage of larger tax exclusions for transfers of jointly owned property. Effective as of January 1, 2009, each married taxpayer can combine their exclusionary allowance and transfer property together, for a total exclusion of up to $26,000. Using the same example, Bob and his wife, Kathy, may both give each of their children up to $26,000 and avoid tax liabilities for each gift.
  
  

Forms

• Since cash donations do not require taxpayers to determine fair market value as they would for nonmonetary property, determining the amount of the exclusion is relatively simple. If Bob were responsible for paying gift taxes because he exceeded the $13,000 or $26,000 combined threshold, then Bob would use IRS Form 706, U.S. Gift Tax Return and Instructions to Form 706 to report and pay his tax liabilities by the federal tax deadline.
  
  

Considerations

• Since tax laws can frequently change, you should not use this information as a substitute for legal or tax advice. Seek advice through a certified accountant or tax attorney licensed to practice law in your jurisdiction.