5 Myths about Gift Tax Laws

It's the one-size-fits-all gift that always fits: money.

Who doesn't want to receive a generous gift from a rich relative? And who doesn't daydream about winning the lottery and sharing the bounty with a few friends or family members?

For wealthy individuals, gifting is a tool used to pass along their affluence without incurring hefty estate taxes. Plus, they can actually watch their loved ones enjoy it.

But gifting has spawned a handful of pervasive money myths. Experts share the top five.

"Everybody thinks this, and everyone is wrong," says Barry Picker, CPA, with the firm of Picker & Auerbach CPAs based in New York. The real truth: The giver has to pay income taxes on money given away, just as he or she would on any other income.

But this is one case in which it is better to receive than to give: For the person getting the money, it is tax-free.

"If I give my (grown) child $10,000, it has no consequences on their tax return -- it's not income," says Peggy Cabaniss, CFP, president of HC Financial Advisors in Lafayette, Calif., and former national board chair of the National Association of Personal Financial Advisors. "And it's not a deduction for me."

The giver, however, could get a tax deduction if the gift is made to a recognized, registered charity. (And, no, needy relatives don't count.)

Wrong again, says Picker. You have a $5 million lifetime limit -- though Congress could change the law when this provision expires at the end of 2012. Give money to one person or many, all at once or over years; it's your choice. But anything over that limit nets the giver a 35 percent tax on the gift, he says.

If you want to give more than $5 million in your lifetime, there is a way: Annual gifts to individuals of $13,000 or less don't count against your $5 million lifetime limit. So you can give someone $5 million one year, and $13,000 every year after that, and never exceed your lifetime gifting limit.

In fact, you can give $13,000 each to as many people as you want every year without raising Internal Revenue Service eyebrows. Married folks can give $26,000 to a single individual by "gift-splitting." But if you give more than the annual exclusion amount, you'll have to file Form 709.

Also exempt from the cap: money for medical care or education that the giver pays directly to the institution. So instead of giving your nephew $20,000 for college, you can write that check directly to Harvard University.

Other wealth-type goodies, such as land, jewelry and stocks, are also included in the annual and lifetime gifting limits, says CFP Jill Gianola, owner of Gianola Financial Planning and author of "The Young Couple's Guide to Growing Rich Together."

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