Taxes 101: The Gift Tax

Tax Tips Happy Birthday to You

While taxes may not be top of mind right now, gifting just may be. Whether you’re picking out the perfect gift for a graduation, wedding, bridal or baby shower, keep in mind the Gift Tax – the IRS write off that allows you to give up to $14,000 to any number of people without facing any gift taxes, and without the recipient owing any income tax on the gifts.

You might be thinking, “it’s my money and I’ll do with it what I want.” Nice thought, but not quite true. You needed to account for it when you earned it, and likely paid tax at that time, and you need to be aware of the rules for giving it away if that’s your intention. Why would you want to do that? The estate tax exclusion has ticked up over the years, and is now $5,490,000. Gifting while you’re still alive can minimize or eliminate the potential estate tax. You know, few things say ‘I love you’ as well as a big check.

Let’s start with the simplest gift issue. You can give your spouse an unlimited of cash or anything of value with no gift tax consequences. If your spouse is not a citizen the limit is $148,000.

For anyone else, you may gift $14,000 per year per person with no tax due and no paperwork required. Your spouse has the same opportunity, so between you, that’s $28,000. If you have two children and they are married, you can see how this can multiply up pretty quickly.

There are some exceptions to this limit. You may pay anyone’s medical bill or higher education expenses with no concern for the limit. To avoid running afoul of the rules, the funds must be sent directly to pay the bill, you cannot send your child a check for $40,000 even if he writes his college a check the same day you’ve just gifted in excess of the limit. Gifts to qualified charities are also not subject to gift taxes regardless of the amount.

There is also an opportunity to transfer more than the $14,000 per person by taking advantage of the 529 college savings account. Current tax law permits you to gift up to 5 years in advance, i.e. a present gift of $70,000. This strategy will require a properly filled out Form 709 gift tax return even though no tax is due.

It’s also prudent to use the 709 to account for any large dollar transactions involving family. For example, you sell a house to a child for $250,000. Years from now, when you pass on, the IRS, while auditing your estate return, may decide that the house was worth far more and assess estate taxes. By filing the 709 and declaring the value of the transaction, you’ve started the 3 year clock on the IRS, once passed, the transaction cannot be questioned.

Don’t worry about knowing these tax rules. TurboTax will ask you simple questions and give you the tax deductions and credits you are eligible for based on your answers.

Comments (8) Leave your comment

  1. Gift Tax

    Does the receipient have to pay a gift tax?

    Does the receipient have to claim the gift of money as income?

  2. if a husband and wife both give the same person a $13,000 gift as per the exclusion do they have to write seprate checks or use separate accounts?

    1. Let me share a real life story which focuses on the reurcnt state of our economy. I have a small law firm of two lawyers. We would like to move our offices into bigger space. We entered into a lease and are planning on moving. Our new Landlord has committed itself to building out the space with new fixtures as well as bringing in new flooring. However, the “standard” items he plans on installing are a notch or two below where my partner and I would like them to be. So, we made a list of “extras” that we would pay for better carpeting more insulation our own signage etc. The cost of the extras came to about $30,000.Here is where the trouble starts. First, we have a 7% sales tax ($2,100). Secondly, we are tapping a line of credit to pay for the extras. Putting aside for a moment the issue of “depreciation” anything we pay to the line of credit is not deductible against our firm income. At the end of the year, assuming we pay off the line a credit, we will have a $30,000 income which will be taxed as a corporate profit and the tax on that will come to about $9,000. So, what we have is a situation where the State and Federal taxes will amount to more than $10,000 and increase the overall investment by 33%.My point is that there are millions of such examples throughout the country and for those such as my partner and myself, who would very much like to buy goods and services, the additional costs (taxes) have a decidedly chilling effect on that stream of commerce. Consequently, we have decided to proceed with some but not all of the originally planned extras those who were going to sell us the goods or provide installation services for those extras will not make the sale or deliver the services and the economy is just that much worse off all as a result of taxes.They say that stories like this constitute a microcosm of the macrocosm and that is how I see it.

    1. Gift tax: Does the receipient have to pay”gift tax”?

      Does the receipient have to declair the gift of money as income?

  3. Where do we put in turbo tax this ” under $13K” contribution to our child? I have looked for hours, looked at the turbo tax FAQ but I can’t find where to put this GIFT in Turbo Tax!

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