The first tax-free donation method is the exclusion of the annual gift tax. Gifts given to a person are not reported or deductible on a federal tax return. Gifts received from a person are not reported on a federal tax return, regardless of the amount received. Unlike donations to charitable organizations, donations you make to unqualified individuals or organizations are not eligible for a tax deduction.
The person who received the gift does not have to pay income tax, even if the value exceeds the gift exclusion tax limit. With the gift division, all gifts made by either spouse will be considered half done by each spouse. The remaining amount is lower than your exclusion, which means you can give it away in a single sum at the end of your life without paying gift taxes. In order for donations to be divided, the donor must file a gift tax return in which the spouse consents to treat the donations as if each had been made in half.
The IRS does not allow a deduction for donations to individuals, although you can get a deduction if your gift goes to a charity or other qualifying organization. In addition, if the value of your gift exceeds a limit defined by the IRS, you may have to pay an IRS gift tax. In addition to charitable donations, there are a few other donations that the IRS recognizes as exceptions to its gift tax law. If you donate more than the exclusion to a recipient, you'll need to submit tax forms to disclose those donations to the IRS.
The IRS gift tax applies to the cumulative lifetime value of donations a taxpayer has made to others. Donations made to charities and other non-profit organizations are not subject to gift tax and may allow the person making the donation to apply for a tax deduction. If you want to calculate the taxable income for donations that exceed the annual exclusion limit, the following table breaks down the rate you'll have to pay based on the value of the gift. Do the above and you'll need to fill out a gift tax form when you file your returns, but you may still avoid having to pay any gift taxes.
In most cases, the stated gift amount that exceeds the annual exclusion will simply be deducted from the taxpayer's lifetime gift exclusion. Gift tax rates range up to 40 percent, but most people don't give away a substantial enough amount to be subject to gift tax. You can't deduct the value of any donations you make (except for donations that are deductible charitable contributions).
