When you give family or friends an exceptionally large chunk of money, you may be required to pay gift tax. While the words “gift” and “tax” may seem an unlikely pair, once you know the gift tax rules, it’s easy to be both savvy and generous.
Know Your Limits
In 2019, you can give up to $15,000 to anyone without needing to notify the IRS. The gift tax limit is per recipient, which means you can give $15,000 to your daughter, $15,000 to your dog-sitter and $15,000 to your favorite officemate. The annual exemption is per person, so a married couple can give each of those recipients $30,000.
Understand the Lifetime Gift Tax Exclusion
Even if you exceed the annual limit, you won’t necessarily be taxed (gift tax is paid by the donor). You also have a $11.4 million lifetime exclusion from gift and estate tax, and your spouse has an additional $11.4 million exclusion.
That means if you give an individual $100,000 in one year, the amount above your $15,000 annual limit — in this case, $85,000 — will be subtracted from your lifetime gift tax exclusion. Keep in mind the lifetime exclusion applies to estate tax, as well. If you exceed the gift tax annual limit by $85,000, only $11,315,000 million of your estate ($11.4 million less $85,000) will be protected from estate tax.
Defining Your ‘Gift’
A gift doesn’t have to be cash. Buying your grandson a new car or handing over your Florida condo to a brother are both “gifts,” meaning you are giving something away without receiving anything in return. The same is true of interest-free “loans” you don’t expect to be repaid. In the case of items that do not have a strict value (such as artwork), it’s smart to hire a qualified appraiser to fix a value.
Additional Exclusions to Keep in Mind
Gifts to spouses who are U.S. citizens, to charity, for tuition and qualified educational expenses, and to cover someone else’s medical expenses are all free of tax. In the case of college or medical bills, you must pay the institution directly in order to avoid the gift tax.
When to Tell the IRS
If you give an individual a gift worth more than $15,000, you must file Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return, even if you’re planning to use your lifetime exclusion and don’t owe the IRS any money. Uncle Sam still wants to know how you’ll be handling the tax.