We all love to get gifts, don’t we? One thing I learned much later than I should have is if someone asks you what you want, tell them. Being too shy to ask for something you dearly want simply sets you up to get disappointing gifts. Not to mention someone close to you has just wasted a bunch of money.
Giving gifts is often more fun than getting them. Sometimes the gift you really want to give is money. Or a car. Or a college education. Or funds for an operation. Beware. Giving gifts can have unintended tax consequences.
Reward Leads to Punishment
Usually the question I get is, when I give someone a gift, do I get a tax deduction for it? Not only do you not get a deduction, but you could also find yourself paying gift taxes if you’re not careful.
The United States has gift tax laws. They were designed to keep rich people from giving away big chunks of their estate without paying estate taxes. This results in an annual dollar limit to the gifts we can give any one person each year without facing gift taxes.
For 2011, you may give someone up to $13,000 worth of gifts during the entire year without paying any gift taxes. That means all presents, including money and presents for birthdays, graduations, and holidays.
Give someone $13,015 in total gifts for the year, and either you will pay gift taxes on that last $15 or you must reduce your lifetime gift-giving allowance. That gift exclusion jumped to $5 million for 2011–12 (from $1 million). Most people will never reach this level, so we don’t have to worry.
Getting around the Limits
Sometimes, you need to give your young married children a lot of money, say for a down payment on a house. When giving gifts to a couple, you may give each person up to $13,000—for a total of $26,000 for the year. A set of parents can give their daughter and her husband up to $52,000. How? Each parent gives the daughter $13,000, for a total of $26,000. Each parent gives the husband $13,000, for a total of $26,000. If the married couple has two children, the parents can give the family another $52,000, by giving $26,000 to each child. Playing with the numbers can be fun, see?
Gifts with No Limits
Certain gifts are not a part of the equation at all. You can give anyone—even if he or she is not related to you—an unlimited amount of money for:
- Education. If you pay the money directly to the educational institution, it doesn’t count as a taxable gift.
- Medical expenses. When you pay the money directly to the hospital or medical provider, you can exclude the whole amount from gift taxes.
This is an important planning tool for grandparents, or same-sex couples, close friends, family friends, or anyone else who just wants to help out.
Rates and Limits
The federal gift tax rate for 2011–12 is 35 percent of the taxable gift. Your state might also have a gift tax. For these two years, the gift tax limit and rate is linked to the estate tax. Since this is a temporary situation, we’re counting on Congress to get to work developing a permanent, or at least long-term, solution.
Read More about Filing Your 2011 Taxes:
Filing Taxes 2011: Should I Do My Own Taxes?
Payroll Withholding Tax: Reevaluating Withholding for 2011