Taxpayers who deduct gifts on their tax returns often wind up getting audited, but that doesn't mean that the IRS disallows all deductions for gifts. In some instances, taxpayers can receive gifts without paying taxes or give gifts and claim a deduction. The key, however, is knowing the IRS rules for tax-free gifts.

Gifts That are Excluded from Taxes

Sometimes, the IRS will allow a taxpayer to receive a gift and not have to pay any taxes on its value. Generally, this only applies in cases where a taxpayer receives the benefits of a paid expense. For example, if someone directly pays an expense on your behalf, you can benefit from this "gift" without having to pay tax on its value if it is for a legitimate expense such as medical care or college tuition.

Similarly, the IRS allows taxpayers to give gifts to their spouses without their spouses having to pay tax on the gift's value. As an example, if a wife gives a husband an expensive car as a gift, he can receive that gift and not be required to pay income tax on the market value of the vehicle. This could result in a considerable savings on the tax return at the end of the year.

The IRS also allows individuals to receive gifts under a certain amount each year without paying taxes on them. This amount is referred to as the annual exclusion amount. In 2009, for example, this amount was $13,000 per taxpayer. In that year, an individual could receive a gift valued up to $13,000 and not have to pay taxes on it.

Tax-Deductible Gifts

On the other hand, what if you're the one giving the gift? Can you ever write the expense off as a deduction? The IRS allows taxpayers to deduct the cost of giving gifts in two specific situations: charity and business. However, each scenario carries a condition that must be met if you're going to deduct the expense.

If you donate anything to a qualified charitable organization, whether it’s property, cash, or possessions, you can deduct the value of these gifts on your tax return. The only requirement is that you itemize your deductions in order to claim the expense. If you give business gifts to your co-workers or colleagues, you can also write them off as deductions. However, this benefit is capped at $25, which means that you can only deduct up to $25 per gift, no matter how much more the gift may actually cost.

Giving gifts can be a great way to improve the quality of a business or personal relationship. As long as you follow the IRS rules for deducting gifts, you'll avoid facing any messy tax problems from gift giving.