Giving gifts makes it possible to help other individuals, and if the gift qualifies as a donation, it could provide you with some tax benefits as well. While gifts and donations are very similar, they are treated very differently when it comes to filing your tax return for the year.
A gift is something that you give to another individual or a business. With a gift, you do not get to take a deduction from your taxable income for the year. In fact, depending on how large the gift is, you may actually have to pay gift tax on the amount. Each year, you get to give up to an annual limit before gift taxes apply. As of the time of publication, givers can give up to $13,000 per year or $26,000 per year if they are married to each individual.
A donation is a gift to a qualified charitable organization. The organization must be qualified under the Section 170(c) of the Internal Revenue Code. These entities are nonprofit organizations, such as churches or charities. When you give money to one of these organizations, you get to deduct the amount of your contribution from your taxable income for the year. This helps lower your taxable income, and it also lowers your tax liability.
Gift Tax Rules
When giving a gift to another individual, you get the annual limit of $13,000 or $26,000, depending on your marital status. Once that limit has been reached, you also get a lifetime gift-tax exemption. As of the time of publication, this limit is $5 million. This means that if you give more than $13,000 or $26,000 in a year, the overage will apply toward your lifetime exemption. You do not have to pay gift taxes until the $5 million limit has been passed.
When you make a charitable contribution to a qualified organization, you get to deduct up to 50 percent of your annual income. To take this deduction, you must have some type of proof that you made the contribution. For example, keep a copy of a receipt or a canceled check to prove that you made the contribution. In many cases, charities give statements at the end of the year so that you can see exactly how much you have given.
- IRS.gov: Frequently Asked Questions on Gift Taxes
- TurboTax: The Gift Tax
- IRS.gov: Eight Tips for Deducting Charitable Contributions
- Internal Revenue Service. "Frequently Asked Questions on Gift Taxes." Accessed Jan. 14, 2020.
- Internal Revenue Service. "Frequently Asked Questions on Gift Taxes for Nonresidents not Citizens of the United States." Accessed Jan. 24, 2020.
- Internal Revenue Service. "What's New - Estate and Gift Tax." Accessed Jan. 5, 2020.
- Internal Revenue Service. "26 CFR 601.602: Tax forms and instructions." Accessed Jan. 13, 2020.
Luke Arthur has been writing professionally since 2004 on a number of different subjects. In addition to writing informative articles, he published a book, "Modern Day Parables," in 2008. Arthur holds a Bachelor of Science in business from Missouri State University.