Dear Carrie: In 2009, I gave my son $15,000 as a gift from my IRA. I declared it as income. Is it correct that, if I had declared it as a gift, it would have been tax deductible? If so, can I claim it for 2010? Thank you so much for your answer. -- Elizabeth
Dear Elizabeth: Wouldn't it be great if the IRS rewarded us for our generosity? Unfortunately, the possible tax deduction that you allude to doesn't exist. IRA distributions are considered part of your adjusted gross income (AGI) no matter what you do with the money. As a result, they are subject to income tax.
The only exception was an IRA Charitable Rollover, available from 2006-2009, which allowed a non-taxable distribution directly to a qualified charity as defined by the IRS. Regrettably, gifts to individuals don't qualify. So the $15,000 gift to your son from your IRA isn't tax deductible from an income tax perspective. And you did the right thing in declaring the money you took from your IRA as income. (One bright spot: Gifts aren't considered income to the recipient, so your son doesn't have to pay income tax on it.)
What you might be thinking of is the gift tax exclusion, which continues to be confusing for a lot of folks.
WHAT YOU CAN GIVE TAX-FREE
Fortunately for people like you who want -- and can afford -- to be generous, you can give a considerable amount of money away in your lifetime without paying gift taxes. That seems like it should be simple enough. But the confusion comes with the amounts that can be given and what is called the lifetime exemption. Let me break it down.
-- Currently, an individual can gift up to $13,000 a year to anyone -- and any number of people -- without incurring gift taxes. So for example, if your son is married and has a child, you could give him, his wife and his child each $13,000 in any one year and not have to declare it on your tax return.
-- A married couple splitting gifts can give up to $26,000 a year to any number of individuals and still pay no gift tax.
But what happens if, as in your case, you give more than the annual limit to one individual? That's where the lifetime exemption comes into play.
WHAT THE LIFETIME EXEMPTION MEANS
The lifetime exemption basically allows you to gift a total of $1 million in the course of your lifetime above and beyond the annual limit before having to pay gift taxes.
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