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If you want to help someone buy a home, you can give as much of a gift as your generosity allows. However, you can't necessarily do it without any tax implications. Unless you're helping a charity, the money you give isn't tax deductible to you, and if you give too much, you -- or your estate -- could actually end up having to pay taxes on the money you gave away.
According to the IRS, a gift is anything you give without receiving something of comparable value in return. If your niece cares for a sickly family member in your home all year, and if you learn that she's struggling to buy a home, you might give her $50,000 toward a down payment. You could conceivably say that you paid her for her efforts. In this case, you received something in return -- you paid her $50,000 for her work. However, if your niece has always been your favorite and you give her $50,000 just because you love her, it's a gift.
The entire $50,000 you give isn't vulnerable to taxation. The IRS allows exclusions, a dollar limit you can give away tax-free. As of the 2012 tax year, the exclusion amount is $13,000 for each person you make a gift to. If you're married, you can double that: you and your spouse are each entitled to give away $13,000 per person. Therefore, if you gave your niece a $50,000 gift and you're single, you'd only have to be concerned about paying a gift tax on $37,000, because the first $13,000 is immune. If you're married, the taxable amount drops to $24,000. If you limit your gift to only $13,000 or $26,000, you won't owe a gift tax at all.
Presumably you already paid taxes on the money you're giving at the time you earned it. If your generosity qualifies as a gift with the IRS, you'll have to pay taxes twice on the amount that exceeds the exclusion: once in income tax, then again for the federal gift tax. The 2012 federal gift tax rate is 35 percent. If you're single, your $37,000 gift will cost you $12,950 in taxes. If you're married and you only exceeded the exclusion by $24,000, you'd owe the IRS $8,400. Gifting money over the exclusion limits requires filing Form 709 with the IRS along with your return.
You have the option of not paying the gift tax and allowing your estate to pay the tax instead when you die. The IRS offers a unified credit that permits you to give away up to $5.12 million over the course of your entire life, as of 2012. If you choose to do so and you therefore avoid paying a gift tax in the year you gave away the money, it lessens the tax-exempt portion of your estate when you die. The same $5.12 million credit applies to estates; only those with a value in excess of this must pay estate taxes. Therefore, if you use $37,000 of the credit to offset the gift you gave your niece, your estate will have to pay estate taxes on any amount greater than $5.083 million, not $5.12 million.
- IRS: Frequently Asked Questions on Gift Taxes
- Pace Accounting & Tax Services: Annual Gift Tax Exclusion for 2012
- Bankrate.com: Estate Tax and Gift Tax Amounts
- Forbes: Gift Tax Under the 2010 Tax Relief Act (P.L. 111-312) Different Rules for 2010, 2011 & 2012
- Cooper, White & Cooper: 2012 Unified Credit -- Last Year for Large Gifts?
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