Gift Taxes & Charitable Contributions

A gift tax is charged when there is a transfer of property, assets or money by an individual, directly or indirectly, to another without receiving the full value of the items in return. The return can be nothing, or something of less value than that of the gift. Gift tax applies to any transaction of such a nature, irrespective of whether the donor considers the transfer a gift or not.

The gift tax applies even if the donor does not intend to give a gift, but receive something of less value in return. For example, the gift tax could be charged on selling something below its full value or giving an interest-free loan. Usually, the donor needs to pay the gift tax, but under certain circumstances the receiver may also pay the tax.

Non-Taxable Gifts

Estate and Gift taxes are considered very complicated, but some gifts are usually not considered taxable. These gifts are:

  • Tuition or medical expenses paid for somebody else
  • Gifts to a spouse
  • Gifts to a political organizations
  • Gifts to qualifying charities
  • Gifts that are not more than the annual exclusion for the calendar year

Taxpayers can receive the assistance of tax attorneys who specialize in estate taxes to determine their eligibility for tax exemption.

Donations to Charity

Taxpayers can save money on their taxes by claiming a deduction for the charitable donations made throughout the year. Charitable contributions are tax deductible, but to claim this deduction, there are certain qualifying factors. These include:

  • Having a written record of the donation made, such as receipts, cancelled checks, and acknowledgment letters from the charity or appraisals.
  • As only donations made to charities having tax-exempt status are tax deductible, taxpayers may inquire about the tax status of the charity before claiming a deduction.
  • Only taxpayers who are eligible to itemize their deductions can claim this tax deduction.

There is a limit on the amount of tax deductible charitable contributions a person can claim. The upper limit for contributions made in cash that are fully tax deductible is 50 percent of the adjusted gross income. Charitable contributions of property are fully tax deductible if they are up to 30 percent of the adjusted gross income. Charitable contributions of appreciated capital gains assets are fully tax deductible if they are 20 percent of the adjusted gross income. Taxpayers can carry over the contributions made in excess of these limits to the next tax filing year.

Charitable Contributions That Do Not Qualify

Some charitable contributions that cannot be deducted are:

  • Contributions made to an individual
  • Contributions made to charitable organizations that do not have tax-exempt status
  • Contributions made where taxpayers expect a benefit in return
  • The value of taxpayers' time or services
  • Personal expenses
  • Qualified charitable distributions from an Individual Retirement Arrangement (IRA)
  • Contributions where there are partial interests in property
  • Appraisal fees
  • Contributions to donor-advised funds

Even though the kind of donations made depends on the amount of and the method which taxpayers use to make the contribution, to claim a deduction taxpayers must include the name of the recipient, the amount of the donation, date, place, and nature of the expenses.

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