Tax Deductible Gifts

As a general rule, most gifts are not tax deductible. That means the gifts you make (give) come from your taxable dollars. The exceptions to this rule are gifts given to designated and registered charities, and gifts given through your business.

In the natural course of business, sometimes it is customary to give gifts. These gifts are tax deductible for some or all of the initial cost. A business gift deduction has a $25 limit per gift for each person whether the gift is given directly or indirectly. The exceptions to the business gift deduction are those gifts that cost $4 or less, have the business name clearly and permanently imprinted on them, and are one of many items that can widely be distributed. Signs, display racks and other business promotional material are not considered business gifts.

You can find Publication 78 on the IRS.gov websites. Pub 78 is a list of qualified organizations that have the ability to receive gifts that allow you to take that gift as a tax deduction. These particular deductions will be itemized on Schedule A, filed with the income tax Form 1040. Cash amounting to more than $500 must be reported on Form 8283. The amount of the deduction is determined by the type of organization (private foundation or public charity) and your gross income. Taxpayers can give up to 50% of their gross income to a designated charity, but only 30% is allowed for private foundations. Corporations are only allowed to gift 10%.

Gifts to family members or friends could be tax-free but won’t be tax deductible. When money or property is gifted to family members or friends, they are tax free up to $13,000 a year (as of 2011) or $26,000 for those married filing jointly. There is no deduction for the taxpayer giving a personal cash or property gift. However, there could be a gift tax, so check the IRS.gov website for more information.

If you have been giving gifts this year, be sure to keep adequate records. You’ll want to keep all documentation showing proof of cash gifts along with any receipts. If you are gifting material items, you’ll want to know the retail value at time of purchase and the fair market value at the time of gifting (donation). Receipts should also accompany item gifting. Deductions are the most common cause of an income tax audit, keeping adequate records is necessary for proof.