Gift Giving Traditions & Tax Consequences

It is December, holiday time to remember and   special time to cherish with your friends and family. Its also considered the special season of giving. Compared to last year, the charitable giving is much better according to the recent reports. Even when the economy still under waters and trying to be afloat, it is amazing to hear that people are still trying to give and share their joy with the needy.   

I just heard from radio today that Facebook founder Mark Zukerberg has signed up Giving Pledge, a Billionaire charity giving initiate started by Microsoft founder Bill gates and Mr. Warrent Buffet. He took the pledge to give away majority of his assets to charities around globe during his lifetime. That’s really amazing thing to do.

You can ask, “why should I have to give?”


Giving is all about sharing yours with others to bring happiness around you. According to law of attraction, by giving you attract more of it.  Many religions encourages to do charity in a great way. They usually recommend to give away atleast 10% of your earnings to charities. Giving not only satisfy our inner soul but also helps to save and get some money in return as an appreciation from Uncle Sam. Tax incentives is an added bonus encouraging many to give. There different ways of giving. You can give/gift to your family members/friends, to charity and may be to your business related people. Every gift giving has different tax consequences.


Tax Consequences


Family/Relative Gifting

If you give to family members or friends, gift tax might apply beyond the annual exclusion limit. Also just about anything you give away could be subject to gift tax. But there are exceptions to it.



1. Give with your whole heart to your sweet heart, you are free from all taxes. Yes, No gift taxes for transfers to a husband or wife. But one catch, if you give a terminable interest property to your wife in which your wife’s interests ends in the future date, you will have to file a gift tax return.


2. Pay directly to schools/colleges or hospitals to cover the tuition cost for your grand kids or medical expenses for anyone.  No tax need to be paid. These are called qualified transfers.

3. You can give as gift to anyone upto $13000 without any taxes and not filing any gift tax return. The annual exclusion is $13,000 for tax years starting from 2009. You wish to give away of than $13000, you don’t have to pay taxes immediately but you will have to file gift tax return Form 709 and let the IRS know about it. IRS will apply to the unified tax credit and defer until you finish all your credit. If you are married you can file the split gifts with your wife and give away upto $26000 without tax liability but must file gift tax return.


Charity Gifting


According to the poll conducted by Red Cross, While 86 percent of Americans reported their personal finances are the same or worse than last year, 72 percent expect to give the same amount or more than last year to charity. The poll also shows that the majority of givers plan to donate more than 100 dollars which is a good news for charities.


When it comes charity giving, no taxes liability for the donor rather donor would be eligible for some tax deductions depending on the property type and contribution value. To get deductions, you should satisfy certain formalities depending on your contribution amount.

For charitable contributions of less than $250, you must keep a canceled check, credit card receipt or electronic funds transfer receipt. Or you must have a letter from the charity acknowledging receipt of the contribution and stating its date and amount. If its $250 or more, you’ll also need a written receipt from the charity substantiating the amount of cash contributed and a description (but not the value) of any property — other than cash — contributed.



And you must disclose whether the organization provided any goods or services (such as a theater ticket or dinner) in return for the contribution.
If you donate property, such as clothing, valued at less than $250, you must keep a receipt from the charitable organization showing the charity’s name, contribution date, physical location of the contribution and a detailed description of the property (but not its value).



For larger donations, you’ll need even more documentation, including a description of how you acquired the property (purchase, gift, inheritance), the date you acquired the property and the original cost of that property. Donated property worth more than $5,000 requires a qualified appraisal, as do lesser-value objects that aren’t in “good” condition. 

Any personal service or volunteering your time won’t be eligible for deductions. But your commute mileage to volunteering would be eligibe. Also there is 50% and 30% AGI limitation on your contribution depending on the type of property and type of charity donated.  Also if a Tangible property like sofa or anything is not put in use for the purpose, it will have deduction limited to 50% FMV.



Any gifts to political organizations are not subject to gift tax, nor are they tax deductible.



In this Web 2.0 age, there are lot of ways to give with a click of a button. You can check websites like
CharityNavigator, GiveWell, Philanthropedia  to contribute or check out VolunteerMatch.com to match with organizations to volunteer your time.

Business Gifting


If you are self employed or in business, you have to honor the relationship with people like clients, associates, and employees  in your buiness during this holiday times. Even small gifts goes a long way and those gifts are deductible up to $25 per year per recipient and deduct them on your income tax return. Mailing and wrapping paper, gift cards are considered are not included in the $25 cap.


But unfortunately $25 won’t be enough to satisfy different types of business people, and you might need to spend more than $25. In that case you have an option. You could take them out for dinner/lunch and claim it as meals and entertainment expense. These expenses are subject to a 50% hair cut but atleast better than a cheap $25 gift right!


Conclusion

Whether you are giving to family member/friends or to a charity or business related people, just keep in mind that you not only making someone happy but also making yourself indirectly by getting deductions or sharing your wealth. So give generously to charities and carefuly to others to avoid taxation.

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