Giving gifts to family, friends, or beloved organizations or institutions are common at the end of the year. Acts of kindness and generosity are almost always appreciated. However, for those who have given or received large gifts this year, you might be wondering if there could be tax consequences.
Here, we’ll explore the gift tax ramifications of receiving large gifts and giving large gifts to friends and family.
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Do cash gifts count as income?
The IRS considers a gift to be money or items of value given to another person without receiving anything of value in return. A gift is not considered to be income for federal tax purposes.
Individuals receiving gifts of money, or anything else of value, do not need to report the gifts on their tax returns. Those who give gifts may need to report any gifts to a single person that, when combined, exceed the annual exclusion. The person providing the gift might owe tax on the gift and may not deduct the value of the gift on their federal income tax returns.
In general, the following gifts are not considered taxable by the IRS:
- Gifts that, in total, do not exceed the annual exclusion.
- Gifts to spouses.
- Payments made directly to medical or educational institutions for someone else’s benefit.
- Gifts to political organizations for their use.
What is the largest gift I can give to friends and family tax-free?
When considering whether your gift will be tax-free, you must consider the taxability in two parts: the annual exclusion and the lifetime gift-tax limits. Remember that a gift can be money or items of value.
The annual exclusion allows you to give up to $15,000 to any individual without needing to file a gift tax return. You and your spouse may each give up to $15,000 to the same individual without being subject to gift taxes.
You may give an unlimited number of individuals up to $15,000 for tax year 2020. The IRS assesses the amount of the annual exclusion each year.
If you choose to give an individual more than the annual exclusion amount in a given year, you will be required to file a gift tax return (Form 709).
Even if you have given an amount that is over the limit for the year, that doesn’t necessarily mean that you will owe gift taxes. The IRS currently allows you to make up to $11.58 million in gifts cumulatively, over the course of your lifetime without being subject to gift taxes.
For example, if you gave your child $250,000 this year, $15,000 (or $30,000 if married) would be attributed to the annual exclusion. The remaining $235,00 (or $220,00 if married) would be deducted from the lifetime exclusion amount for that year.
Once you have exceeded the lifetime exclusion amount, you will be subject to gift tax rates of between 18% and 40% of the amount gifted.
While these are the general rules with regard to gift taxes, tax liability can vary depending on individual circumstances. You should consult with a tax professional if your tax situation is complicated and you need advice on your overall tax strategy or the consequences for specific decisions that could affect your tax liability.
How does the IRS know if I’ve given a large gift?
The IRS requires you to file Form 709 if you give a large gift in excess of the annual exclusion amount during the tax year.
Form 709 is not required for gifts that do not exceed the annual exclusion amount.
What are some ways I can give generously to friends and family without gift tax consequences?
Gift taxes don’t have to be an obstacle that prevents you from giving your wealth away to friends and loved ones. You can work to ensure your ability to give the maximum value of your wealth tax-free through careful planning.
Utilize the annual exclusion
You can give up to the annual exclusion amount (currently $15,000) to an individual tax-free. If you are married, your spouse can also give the annual exclusion amount to the same individual. This is a simple way of doubling your gift.
Pay the institution directly for medical and educational expenses
Don’t write a check directly to a loved one if you are helping them with medical expenses or educational costs. Instead, pay the costs directly to the medical care provider or educational institution. The IRS doesn’t consider these costs to be gifts for gift tax purposes, allowing you to give more.
The gift tax rules for your generosity can be complicated. It is best to work with the assistance of a qualified tax professional to help you to navigate the process. If you have questions about gift tax laws and would like to consult with a tax attorney, talk to a Rocket Lawyer On Call® attorney for affordable legal advice. The IRS also provides guidance on gift taxes on its website.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.