It’s fairly unanimous that receiving a gift, especially in the form of cash, is a great feeling. You don’t have to pay anybody back, and you can do whatever your heart desires with the funds. Unfortunately, while most people agree on the joy of receiving gifts, the law has a view on gifts similar to it’s view on any other money that you receive: you owe taxes. Below we’ve outlined some basic things to keep in mind about receiving and giving gifts to keep in mind when it comes time to pay taxes.
As of 2018, you and your spouse may gift up to $15,000 each ($30,000 in total) to as many individuals – except to each other if either of you are U.S. residents – as you want per calendar year so long as you file a gift tax return. The giver can actually go over the $15,000 limit if they are single and show an excess of $6,000 and if they are below the $11.2 million lifetime threshold. Until the giver reaches the lifetime threshold, they don’t have to pay any gift taxes.
Gifts That Do Not Count and Don’t Need To Pay Tax
The IRS has 4 exemptions to the general gift tax rule. The first is the annual exclusion of the $15,000 per the calendar year (or the lifetime exclusion). The second exemption is paying for an individual’s tuition and medical bills without paying the gift tax as long as you pay directly to the institution, not writing a check to the individual to do it themselves. The third is money you give your spouse if they are a U.S. resident and the fourth are gifts to political organizations.
Not-So-Obvious, Taxable Gifts
Unfortunately not all gifts are as obvious as just gifting someone a sum of money. Gifts where you made a transfer of cash or property without expecting anything in return outside of the 4 exemptions will count as a gift. For example, if you sold someone a house that was worth $1 million dollars for $900,000, you made a gift of $100,000 under the IRS’s definition of “fair market value.” The fair market value means that neither the buyer or seller were under any duress when committing the transaction. Another gift you probably didn’t expect was a gift was giving a friend a loan without charging them interest. Even adding a child as a joint owner to your bank account to help manage finances can be considered a taxable gift.
Gifts That Can Land You in Trouble
Gift-giving is good, but gift-giving in a way that is meant to specifically avoid being subject to gift taxes is easily recognizable by the Internal Revenue Service (IRS). If you are a parent and you give your child a loan, the IRS will see this as a gift so long as you forgive the repayments each year, particularly in an amount equal to the annual gift tax exclusion. The IRS is also keen to instances where a gift is given to one person but is actually meant for another. If you receive a gift and immediately transfer it to someone else, you are putting yourself at risk of ending up in a skirmish with a federal agency – not a good idea. Another no-no is a gift with strings attached. If you want to give it, give it; don’t try to hold onto it and create another tax-liability for yourself.
All in all, giving money to someone within the exemptions rules won’t get you in trouble with the IRS, but if you are considering an elaborate gift, you should consider speaking to a licensed estate planning attorney to ensure that you are able to make the gift while incurring the least tax liability possible.