What is the annual gift tax exclusion and how is it different from charitable contributions?

Comedian Bill Cosby’s two main interests in life have been to entertain his fellowmen and a desire to teach them how to live. He is a devoted family man and a noted philanthropist. He said “Give your children enough money so that they feel like they can do anything, but not so much that they could do nothing.”1 Our federal government follows this credo by allowing each person, which could be a husband and wife, to give $13,000 each year to an unlimited number of people. For decades the exclusion was $10,000 and this year it is $13,000. The amount will be the same in 2011. So in 2010 grandparents could give $26,000 to a grandson for college and $26,000 to a granddaughter for the down payment on a house and up to $26,000 to fund a special needs trust for a disabled adult nephew and so on. Because the gifting is done with after tax dollars these gifts are not taxable to the relatives. The exclusion terminology refers to whether the monies will be counted as part of your estate after you die. Any amount given over the gift tax exclusion cap will require you to file a gift tax return with your income taxes and will be pulled back in to your estate, but this does not necessarily mean you will have a taxable estate. Close to 65% of all grandparents provide some kind of annual financial support to grandchildren.

The gift tax exclusion is an important inheritance and Medicaid planning tool at this time of year. If you plan to deed over a vacation condo or your home to your children retaining a life estate for yourself, then you can give a portion of the real property interest in 2010 and portion in January in 2011.

The gift tax exclusion does not apply to charities. The charitable deduction is used when you itemize on your income taxes and it generally is limited to 50% of your adjusted gross income for cash donations and 30% for property, such as real estate or stocks, given to charities. Over half of all charitable gifting occurs in the last part of the year, and it’s not too late, but you must actually make the donation by December 31. With charitable gifting down this year, your contributions are critically important. Remember you can use a credit card and pay the bill in January. For donations of less than $250 you must have a record of what you donated or a receipt to claim it on your taxes, and this includes donated furniture, clothing and goods. Check out www.salvationarmyusa.org for estimates of values on used items. For donations over $250 you also need an acknowledgement from the charity and to fill out IRS Form 8283. For much larger last minute charitable gifts, consider donor-advised funds run by financial services firms and community foundations that allow you to gift appreciated stocks before the end of the year with the investment remaining in the account, and you can decide next year how you want the monies split to your favorite charities. ________________

1Kirkland, “Should You Leave It All to the Children?”, Fortune, Sept. 29, 1986.

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