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Is a Personal Gift from an IRA Tax Deductible?


April 28, 2010

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.


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, and as a result 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 $1,000,000 in the course of your lifetime above and beyond the annual limit before having to pay gift taxes.

Annual limits can change year to year, but right now if you give an amount greater than $13,000 ($26,000 for a couple) to any one individual in a given year, while it doesn't trigger a gift tax, you still have to file a gift tax return. This extra amount will then count toward your lifetime exemption. It's only after you exceed $1,000,000 that you have to be concerned about actually paying gift taxes.

So in your case, in 2009 when you gave your son $15,000 from your IRA, while you correctly declared this as income, you also needed to file a gift tax return (IRS Form 709) by April 15, 2010 to declare the excess $2,000. (If you split this gift with a spouse you would still need to file a gift tax return, but you would be under the individual annual exclusion limit.) It's probably wise to talk to your tax advisor to see if and how you should correct this oversight.

The value of future gifts

While this information may help you with the technical aspects of future gifts, whether from your IRA or other assets, I always think that giving money to our kids is a great opportunity to provide an educational as well as an economic boost. For instance, what did your son do with the money? Pay off debts? Make a down payment on a house? Contribute to his own retirement? Any transfer of funds from parent to child (no matter how young or old!) can open the door to fruitful discussions about the importance of budgeting, getting a handle on debt and saving for retirement.

I'm a big believer in one generation helping the next. But I'm also a big believer in sharing knowledge as well as wealth. Talk to your son about how you saved for retirement in your IRA, and how that saving allowed you to help him. Doing so may increase the long-term value of your gift—and give you the personal reward of knowing you're helping your son plan for a more secure financial future. That can more than make up for the lack of a tax deduction.

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