Gifts to family members are not tax deductable.
Donating to charity, giving away gifts or property and placing assets in a trust are all great ways for a person to decrease her tax burden, but all of these methods must meet stringent criteria established by the Internal Revenue Service and comply with federal tax laws to count. Understand what qualifies as a deduction and what does not before giving money or tying it up in a trust fund.
Understanding Deductions
Be absolutely clear as to what a deduction is. It is not the same as a tax credit or tax exemption. When you make a charitable contribution that is tax deductible, it means you deduct the amount of the gift from the amount of money you are being taxed on after taking into account any money that is tax exempt.
For example, if a person earns $1,000 but $200 of that is tax exempted, then that person will taxes on $800. He can then deduct the amount of tax-deductable gifts or donations from that $800, thus further decreasing the amount of money on which taxes need to be paid.
Charitable Donations
Money or property donated to charity organizations is only tax deductible if that organization is deemed a tax-deductible entity by the IRS. Most 501(3)(c)s or non-profit organizations meet this criteria, but confirm that this is the case. Alternately, you can get a list of qualified organizations from the IRS by calling 800-829-3676 and requesting Publication 526, Charitable Contributions.
Other assets, such as stocks or securities, can also be deductible when donated to a qualifying organization.
Property is deducted based on its fair market value at the time of the donation.
Gifts to Individuals
Gifts to family members are can be tax-free, but not tax-deductible. When money or other assets such as property or stocks, are given to family members or friends, they are tax-free up to $13,000 a year as of 2010---meaning the person who gives the gift does not have to pay a tax on the gift. The person who is receiving the gift does not have to pay taxes on it, either.
Trusts
Trust funds are also tax-free, but not necessarily tax-deductible. Money placed in a trust can help a person reduce her estate tax (a one-time tax paid on the value of a person's entire estate upon death), but contributions to a trust fund are not tax-deductible or tax-exempt. Trust funds should not be confused with retirement accounts.
Documentation
Receiving a tax deduction for a charitable contribution is not as simple as writing a check or dropping off a used car. Every kind of donation, even cash, must be documented and recorded on the proper IRS form (sometimes several forms) for the deduction to be awarded.
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