When giving a cash gift, tax implications must be carefully analysed. Cash gifting may be considered a taxable event that would result in a gift tax liability. Understanding the fundamentals of cash gifting is a vital part of a personal tax planning. Knowing how to give a tax-free cash gift is valuable knowledge that may result in significant tax savings.
According to the Internal Revenue Service (IRS) Bulletin 950, "any gift is a taxable gift." In eyes of the IRS, if a taxpayer is making a gift by giving or transferring property and/or money without expecting to receive something in return, such event may trigger a federal gift tax liability. In fact, effective 2010, the gift tax rate will equal the highest individual income tax rate or 35 per cent.
Certain types of gifts are exempt from taxation. Tax-exempt gifts generally include the following items: gifts of future interest; tuition and medical expenses paid directly to the educational or medical institution on someone's behalf; gifts to your spouse; gifts to a political organisation for that organisation and cash donations to the qualified charities. The IRS specifies that if the payment is made directly to the medical or educational institution and not to the beneficiary directly, such cash gift is not subject to tax regardless of the amount.
When planning to give a cash gift, you need to consider the gift annual exclusion amount. For example, in 2009 you could give up to £8,450 a year to as many persons as desired without paying a gift tax. The annual gift exclusion is the amount that applies per person who does the cash gifting, not per family. In other words, a married couple could gift £16,900 per year to as many individuals as they want without worrying about a gift tax liability. Gifts of future interest, however, are not subject to the annual exclusion amount. However, as Miranda Marquit points out in "The Basics of the Gift Tax Exclusion" gifts in check format "must be cashed in the calendar year for which you count them. That means your recipients will need to cash the check before Dec. 31 if you want the exclusion to apply for this tax year."
The concept of the gift tax marital deduction allows the taxpayer to make the unlimited tax-exempt transfers to a spouse. This approach is used when one spouse is helping another to build her assets without incurring any tax liability. It's important to remember, however, that the gift tax marital deduction amount for federal purposes may differ from the amounts established by each particular state.
The IRS separately discusses giving gifts to minors. This aspect is given a separate attention by the taxing authorities due to the fact that a child is generally not capable of managing his own financial affairs. Both the states and federal government discourage the cash gifting to the minors. In "Giving the Tax-Free Way," author Ashlea Ebeling advises parents and grandparents to consider contributing to Section 529 college savings plans for the minors, which would ensure that "money in these accounts grows tax-deferred and can be taken out and used tax-free for college or graduate school."
If you have given gifts during the taxable year, it does not necessarily mean that you should file a gift tax return, Form 709. The return would not need to be filed as long as the following criteria is met: (a) no gifts are made to the taxpayer's spouse; (b) no more than £7,800 was gifted during the year to any one cash gift recipient; and (c) all of the gifts made by the taxpayer were constituted to be gifts of present interests. Additionally, no gift return is needed to report gifts to a spouse regardless whether these gifts are of present or future interests.