The first method of tax-free donation is the annual exclusion of gift tax. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable.
Parental support payments for a minor are not gifts if required as part of a legal obligation. So you don't have to worry about paying the gift tax on, say, a sweater you bought for your nephew for Christmas. This method should be reserved for taxpayers who have no record of which tax year (s) a gift tax return was filed. Caring is sharing, but some situations often inadvertently cause the need to file a gift tax return, professionals say.
If you do not file a gift tax return, the IRS may question the valuation of the property at any time in the future. The IRS defines a gift as “any transfer to a person, either directly or indirectly, in which full consideration is not received in return. This allows you to specify certain gifts for your family and friends and minimize the amounts deducted for taxes. The IRS applies gift tax if you transfer money or property, with a value greater than an exempt amount, to another person without receiving at least the same value in return.
But, if there is a national gift tax, why don't you have to declare your birthday money every year? Form 4506, Request for Copy of Tax Return PDF, is used to request a copy of previously filed tax returns with all attachments. Making a gift or leaving your estate to your heirs usually doesn't affect your federal income tax. Many people avoid paying gift taxes entirely in their lifetime, simply by following the tips above. If you sell property or family heirlooms to your child for fair market value, you don't have to file a gift tax return.
While it is rare to find gift tax, given the exclusions and limits, there are situations where this cost may seem inevitable. Being married is an easy way to double your giving power, since both you and your spouse are entitled to the annual exclusion amount of a donation. If you plan to donate a sizeable amount of dollars to a loved one, be sure to follow these five practical tips to avoid the gift tax on your gift.