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Are Gifts Taxable?

Holiday season - a time for giving to friends and family, but not, you hope, to the IRS....

Holiday season - a time for giving to friends and family, but not, you hope, to the IRS. Many, if not most, people are aware that the Tax Code imposes a tax on certain gifts, but not everyone is certain as to how this works. How do you know when you've given the gift that keeps on taking - a taxable gift?

Exclusion Amount

The general rule is that there is a designated limit above which gifts become taxable to the giver. For the 2008 tax year, that limit is $12,000. For 2009, the limit is $13,000. The gift tax threshold is from each donor to each recipient per year. In other words, a donor may give multiple gifts to a single recipient in 2008 up to $12,000, and may repeat this with an unlimited number of recipients without incurring gift tax liability.

Furthermore, married couples may give up to $24,000 during 2008 ($26,000 in 2009) to each recipient in a year without incurring tax, but to do this, they must indicate on a gift tax return that they are electing to split the gift. For a $24,000 gift on December 31 and a $26,000 gift on January 1, that's a $50,000 gift within a two-day period that can be gift tax free.

Contributions to so-called 529 plans are subject to this limitation, except that a donor may "front-load" giving by contributing up to $60,000 to an individual's account in a single tax year and counting the gift against that year and the four succeeding years. This does make any gifts to that individual in the subsequent years taxable.

Exceptions to the Rule

Some gifts do not count against this threshold. There is no limitation on gifts to spouses or charitable organizations (although there are limits on the tax benefits of charitable contributions). Payments for medical or educational expenses also do not count against the threshold if the money is paid directly to the source of the expenses. A gift of $15,000 to a relative for college tuition is a taxable gift, but a $15,000 payment to the college is not.

Even when a gift exceeds the threshold, it is not necessary to pay tax on the gift. This is because in addition to the annual exclusion amount, there is a lifetime credit against the estate and gift tax. The credit effectively exempts the first $2 million of taxable gifts from gift tax in 2008, ($3.5 million in 2009) and must be claimed by filing a gift tax return, Form 709.

The gift tax applies not only to gifts of cash, but also to property. The value of property given as a gift counted against the exclusion amount is the fair market value of the property at the time of the gift, whether the gift is of stocks and other securities or more traditional holiday presents, including food and drink.

To sum up, a taxable holiday gift occurs when the total value of all gifts, both of money and property, to an individual over the course of a year, excluding direct payments for medical and educational expenses, exceeds the exclusion amount, which is currently $12,000. When given with a business context, however, it is the recipient and not the giver who is generally subject to tax. Nevertheless, certain important exceptions apply within that general rule. If you need further assistance in sorting out the tax repercussions of holiday gift giving, please feel free to contact this office.