Taxable Gifts & The Season of Giving
Posted October 28, 2021
It’s here— the season of giving.
We see it all around us— people are giving gifts, holiday cards, spare change, generous tips, and year-end donations everywhere we look.
The generosity is contagious and may spur you to donate or give a significant gift to a person or organization that is near and dear to your heart. You may start to wonder whether or not your gift is taxable.
The team at Thayer Financial has put together a list of 7 basic principles to answer some of the most frequently asked questions about taxable gifts.
What Is A Gift Tax?
The first thing to know is what the gift tax is. Essentially, the gift tax is a federal tax on any transfer to an individual where nothing is received in return. Depending on the size of the gift, this tax can range up to 40%. However, not all gifts are equal.
When Does A Gift Become Taxable?
Individuals will not start incurring the gift tax until the annual gift exceeds $15,000 per recipient. If you exceed the $15,000 gift for one recipient, you will need to file a gift tax return. However, it is not until you have accrued $11.7 million in taxable gifts that you begin owing a 40% gift tax on additional gifts.
This $11.7 million threshold is because of the lifetime exclusion. The $11.7 million gift limit is the amount that an individual can give throughout their lifetime, and it only applies to any amount over the $15,000 annual exclusion. If you surpass the $15,000 annual exclusion within one year, you may not have to pay a gift tax because of the lifetime exclusion, but you will need to report the gift on your tax return through IRS Form 709.
Are There Any Exclusions to Gift Taxes?
Are you wondering about your child’s college fund that you’ve been stashing away? Or that new car you just bought your spouse? According to the IRS, there are several exceptions to the gift tax, including gifts under the annual exclusion amount, tuition or medical expenses paid for someone else, gifts to your spouse, and gifts to a political organization for its use. Additionally, “gifts to qualifying charities are deductible from the value of the gifts.”
So, I Can Only Give $15,000 Per Year Before Being Taxed?
No, the $15,000 annual exclusion limit is per recipient; it is not the sum of your annual gifts combined. If you are married, another important point to remember is that the annual exclusion is per person. This per-person exclusion means that both you and your spouse can gift $15,000 to an individual without the IRS getting involved.
Can I Deduct Gifts On My Income Tax Return?
According to the IRS, making a gift will most likely not affect your income tax return. Other than deductible gifts made to charitable organizations, you cannot deduct the value gifts you make.
What May Trigger a Gift Tax?
It can catch you by surprise— what you may see as a harmless (yet lavish) gift could come back to cost you—paying for your child’s extravagant wedding? Watch out for the price tag. Are you lending a friend a loan to start a business? You guessed it— gift. There are thousands of different scenarios that could trigger a gift tax, and the safest way to avoid it is to know the exclusions provided by the IRS or talk to a financial advisor about your concerns.
What If I Still Have Questions on Taxable Gifts?
If you still have questions about what a taxable gift is, how it works and how it will affect you, give the team at Thayer Financial a call. As a fiduciary, we work with your best interest in mind all of the time. With complete transparency, no kickbacks, and no commissions, you can trust that you’re receiving sound financial advice with no grey areas.
Thayer Financial is ready to help answer any questions you have concerning taxable gifts from the perspective of comprehensive financial planning. Thayer Financial is your dedicated resource for fee-only, fiduciary advice as independent financial advisors in Hickory, North Carolina. Schedule an appointment or call us today.
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