GIFTS MAKE A GREAT DOWN PAYMENT

If you are looking to purchase a home you may have a family memeber who wants to help. When using gift money, there are a few things to know:

Tax Rules for Gifts

1. No deductions for the donor or for the recipient.
Gifts don't produce deductions for the donor or income for the recipient. And most of the time there's no gift tax, either. But if you give more than the annual exclusion amount ($12,000 for 2006 and 2007) to one person other than your spouse in a single year, you'll have some planning concerns — and a reporting obligation.

2. Recipient Doesn't Report Income
Gifts you receive aren't considered income. It doesn't matter how large they are. You don't report them on your income tax return in any way. There are a couple of important qualifications on this simple rule:
True gifts. This rule applies only to true gifts. You can't avoid paying income tax by calling something a gift when it isn't. For example, a "gift" you receive in exchange for services or some other consideration isn't a gift.
Income after gift. If you receive a gift of property that produces income, you must report any income produced after the gift. For example, if you receive stock as a gift, you must report any dividends paid on that stock after the gift.

3.Gift Tax
Although there's no income tax on gifts, there is such a thing as a gift tax. The gift tax is imposed on the donor. The person receiving the gift does not have to pay this tax. Most people don't have to worry about this tax because it generally doesn't apply until you make gifts exceeding annual exclusion amount to one person within a single year.

4. The Annual Exclusion
The annual exclusion is adjusted for inflation and applies to each person every year. The amount for 2006 and 2007 is $12,000.
Example: On December 31 you give $10,000 to your son and $10,000 to your son's wife. On January 1 (the next day) you give another $10,000 to your son and another $10,000 to your son's wife. If you made no other gifts to your son or his wife during these two years, all of the gifts are covered by the annual exclusion.
If you're married, your spouse can also make the gifts described in the example. You and your spouse each have your own annual exclusion amount, even if you file joint federal income tax returns.
Expections: There is an unlimited exclusion for gifts to your spouse. (An annual limit applies if your spouse is not a U.S. citizen.) And there's an unlimited exclusion for the payment of medical expenses or educational costs, provided you make these payments directly to the service provider or educational institution.

Giving More Than the Annual Exclusion Amount
If you give more than the annual exclusion amount to one person in a single year you'll have to file a gift tax return. But you still won't have to pay gift tax unless you have given a very large amount. The rules let you give a substantial amount during your lifetime without ever paying a gift tax. As of 2006 the amount is $1,000,000. You don't use up any of this amount until your gifts to one person in one year exceed the annual exclusion amount. For example, if you make a $14,000 gift in 2006, you have used up only $2,000 of your lifetime limit. Any amount you use out of your lifetime gift tax exclusion counts against the estate tax exclusion, which is $2,000,000 (for 2006 through 2008). This means that if you use $250,000 of the limit by making gifts during your lifetime, you have reduced by $250,000 the amount that can pass through your estate free of the estate tax. So you shouldn't ignore your lifetime limit even if you feel certain that your lifetime gifts will never add up to that amount. It pays to plan your gifts around the annual exclusion amount and the exclusions for educational and medical expenses wherever possible.

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