Receiving a gift or giving someone a present may have tax implications. Generally, the person donating the gift pays for the tax if there is tax to be paid. There are various rules that govern the taxation of gifts. Some of these rules are given below:
- General Donation Rules – Gifts donated to individuals other than your spouse, a charity organization, or a political party, are subject to taxation if the value of the gifts is more than $13,000.00 a year for the 2010 and 2011 tax years. Form 709, “United States Gift (and Generation-Skipping Transfer) Form” is filed for the gifts that exceed this annual threshold. The annual cap is for gifts donated to a specific person and not the total value of the gifts donated to different people. The person who receives the gift is not taxed on the gift. Even if the utilization of the gift is to be in the future, a tax return still needs to be filed, irrespective of the value of the gift. For example, if a donation is given towards an individual’s retirement fund that cannot be accessible to the person until he or she retires, a tax return needs to be filed for such a donation, irrespective of the amount. However, if the donation is below the annual cap, no taxes will be paid.
- Donation to a Spouse – A donation made to a spouse is not taxed, irrespective of the value of the gift. However, if you give an interest of a property to your spouse or receive such an interest from your spouse, and such a gift is set to lapse at a given future event, then a tax return needs to be filed on the Form 709.
- Gift Splitting – If a married couple makes a donation of a gift to someone, then the value of the gift can be split for taxation purposes. In other words, the cap for such a gift will be $26,000.00 a year as each spouse will be utilizing their portion of the $13,000.00 tax-free-gift allowance. This is called gift splitting. You will need to file a tax return, even if the total value of the gift is less than $26,000.00 and you need to indicate in the Form 709 that both spouses were in agreement to the gift splitting.
- Charity Organizations – Gifts made out to charity organizations are generally not taxed for qualifying organizations. Furthermore, donations made to charitable organizations are tax deductible. This means that you reduce your tax debt by claiming deductions with the amount of donations made.
- Political Parties – Donations made to political parties are not taxable. However, such donations need to be used strictly for the purposes of political use, such as campaigns.
- Tuition and Medical Expenses – Any gifts given to individuals for the purposes of education and tuition fees or for medical expenses are not taxable. However, such gifts need to be donated directly to the medical or educational institutions and not to an individual person for the gift to qualify for the tax waiver.