Gifting is a practice that is centuries old. It can mean many different things to many different people. In today’s culture gifting is typically done as a token of friendship or as a thank you for something done. However, what is the point of all of this? Why would anyone want to give a gift?
The purpose of gifting is to thank someone for something they have done for you. A present or a gift is basically an object given to somebody without expectation of anything in return or payment. So, when a person gives you a present on the basis of gifting you generally have no right to ask for any payment for it. Generally, though, a present isn’t a gift unless that present is already owned by the person to whom you are giving it.
But that is where the cost basis thing comes into play. Cost basis means that the value of a gift that has been done or is being done is the determining factor in whether or not the donor receives anything in return for gifting you. For example, a tax check that a donor gave to you because you helped him with his children’s dental bills could be considered a gift even though that tax check itself would have a cost basis. If the cost basis were lower than ten dollars that check would be a taxable gift and you would receive a refund.
There are many cases where the cost basis is not going to be a big deal. Suppose you are doing a big Christmas hamper and you know the cost basis of a couple of thousand dollars. You probably will not receive a large amount of cash back from doing a big Christmas hamper. So what happens is that your donor may decide to just give you one thousand dollars worth of the hampers and since you got a thousand dollars worth of hampers, then your donor will be able to give you a tax deduction of about ten percent on that gift which means you will be able to save a significant amount of money on tax form 1040.
The other situation in which the cost basis won’t be a huge issue is when the donor has done something for you but has not given you any kind of tangible item as a gift. For instance, if you went out and bought a plane ticket for your parents to come to your home to help celebrate your first year in college, the gift tax deduction wouldn’t be very big. In most cases a plane ticket is not considered a tangible item, but if your parents did pay for it, you can claim it as a donation.
But sometimes the cost basis issue can cause some issues when you are gifting someone a great item. So, when you are doing some gift giving, consider what the cost is for each item that you are gifting, and don’t just give me a few bucks and get me my basket of chocolates. You have to keep in mind how much your donor actually spent on you and keep in mind that some people might not be able to receive all the things that they have requested especially if you are not giving them a specific dollar amount. So always keep this in mind when you are doing your gift giving so that you will be able to avoid giving the wrong things.