Published December 02, 2010
It’s the holiday season and the time for giving. Shall I take a chance on destroying your holiday spirit by talking about gift taxes? Actually, you will probably feel a whole lot better after you read this.
Over the years, I’ve fielded a number of questions relating to the taxability of gifts. They usually go like this: “My grandmother gave me $20,000 for Christmas. How much tax do I have to pay on that?”
The answer always surprises them: none. Zero. Nada. Grandma can give you $20 million and you wouldn’t owe a dime in taxes. How can that be? Well, the first rule on gift taxes is that the recipient isn’t taxed. It’s the giver who winds up with the tax bill.
So from grandma the question I get is, “I gave my grandson $20,000 grand for Christmas. Can I write that off?” They don't like when I tell not only is it NOT a write off, but they could be liable for gift tax.
First of all, what is a gift? According to the IRS, “It’s a transfer of property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return.” If you sell something for less than its fair market value or if you make an interest-free loan or even a reduced-interest loan, you could be making a gift.
Just about anything you give away could be subject to gift tax. But there are exceptions:
1. Bestow all you want on your spouse. Get lavish. No gift taxes for transfers to a husband or wife. But you will have to file a gift tax return if you give your spouse interest in property that will be ended by some future event.
2. Pay tuition or medical expenses for anyone--as long as you pay it directly to the medical or educational institution. No tax will be due.
3. Be generous with bona fide charities - these gifts are deductible and not subject to gift tax.
4. Gifts to political organizations are not subject to gift tax, nor are they tax deductible.
5. Gifts, excluding gifts of future interests, that are less than the annual exclusion for the calendar year are not taxable transactions.
The annual exclusion for all tax years beginning Jan.1, 2009 is $13,000. You can give that much without incurring a tax liability or having to file a gift tax return. Anything above that amount may be subject to gift tax. Married couples can gift a total of $26,000 (twice the annual exclusion) to a single recipient without incurring a gift tax liability.
If you wish to give more than the annual exclusion, you may be able to defer taxes on the gift by applying the unified credit (from your future estate tax) to the gift. This reduces your unified credit in future years but is a good tool to legally avoid paying gift tax now. You are still required to file Form 709 to declare your gifts.
Some gifts, other than charitable contributions, are deductible. You may give business gifts up to $25 per year per recipient to clients, associates, and employees and deduct them on your income tax return. The $25 limitation has been around since day one and I find it aggravating. You’d think the IRS would have adjusted that amount for inflation. Wrapping paper, gift cards, engraving, insurance and mailing are considered incidental expenses and not included in the $25 cap.
And you can’t double this gift deduction by including your spouse or business partner as a giver to the same recipient. Under this definition, you and your spouse or you and your business partners are considered one giver.
If you wish to spend more than $25--you know, like if you don’t want to appear cheap - and get the write-off you may consider giving something that would fall under the category of meals and entertainment. These expenses are subject to a 50% hair cut but what the heck. It could be more advantageous and enjoyable to take your client to a $100 dinner and get a $50 write off than spend $50 on a gift but enjoy only a $25 deduction.
If you are planning to make gifts above the annual exclusion, especially this year with no estate tax to worry about, check with your tax pro to decide how to gift in the most economical and least taxable method possible.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know,” available at all major booksellers. Follow Bonnie Lee on Twitter at and at Facebook.