The Internal Revenue Service’s tax regulations encourage American generosity in the form of gifts to family and friends while you’re alive. Gifts of cash, property and investments that don’t exceed your lifetime gift tax and your annual gift tax exclusion don’t create a tax bill for you or the recipient.
The IRS applies the same limits to your children, parents, other relatives and even your friends. If your financial situation supports your gifting, small or large, there’s no reason to wait to share your wealth with others while you are living. The potential tax implications of gifts fall on the donor instead of the recipient. However, if you don’t exceed the exclusion limits, you won’t see a hike in your annual tax bite.
Lifetime Gift Tax Exclusion
Under 2020 tax laws, the IRS gives you a lifetime gift tax exemption of $11.58 million. Couples enjoy a $23.16 million lifetime gift tax exemption. In addition, married U.S. citizens may inherit an unlimited amount of property from their spouse, notes Smart Asset. Expect inflation to increase this lifetime limit in the future.
Donor’s Annual Exclusion Limit
For 2020 and 2021, the IRS has set the annual gift tax exclusion for individual taxpayers at $15,000 per recipient. This amount includes cash and property. For married couples, the exclusion doubles to $30,000. If you don’t give any recipient more than the annual limit, the IRS lets you keep track of your annual gift amounts yourself.
You must report every gift amount that exceeds the annual exclusion limit on your tax return. Any individual gift amount above your annual exclusion limit reduces your lifetime gift tax exclusion. When gifting property, you should get an appraisal and report the fair market value of the property on your tax return when required.
Gift Recipient Benefits
One major benefit that your gift recipient gets from your early gifting is the enjoyment of the support that your gift gives them. The gift is tax-free for them, and they could benefit from letting it grow, says Schwab.
Cash gifts might help your children or a close friend start a business. You can give your grandchildren money to explore educational opportunities without incurring crushing debt. Some giftees will be happy to save a gift from you that could help them feel more secure about surviving economic setbacks. Your children, parents and even friends might appreciate a gifted vehicle that supplies reliable transportation.
Inheritance Gifting Advantages
Except for qualified charitable organizations, gifts are not deductible for donors. Your gifts won’t reduce your adjusted gross income or your taxable income. As the donor, of course you get to enjoy the appreciation of your recipient’s appreciation.
However, some gifts that you make have a more far-reaching effect. When you use strategic gifting, you can reduce the value of your estate. Your heirs will benefit from receiving some of their potential inheritance in advance of your death. In addition, their estate tax burden will be less.
Ultimately, it’s possible that the funds or property you gift to your heirs while living will position them financially to handle estate taxes when they come due. Financial advisers can help you decide if advance gifting or early inheritances can offer estate tax advantages to your heirs.
- Smart Asset: What Is the Lifetime Gift Tax Exemption?
- Internal Revenue Service: Frequently Asked Questions on Gift Taxes
- Schwab: Sharing the Wealth: How Lifetime Gift Tax Exemption Works
- Internal Revenue Service. "Frequently Asked Questions on Gift Taxes." Accessed April 30, 2020.
- Internal Revenue Service. "2019 Instructions for Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return." Page 8. Accessed April 30, 2020.
- Internal Revenue Service. "2019 Instructions for Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return," Page 3. Accessed April 30, 2020.
- Internal Revenue Service (IRS). "Publication 559: Survivors, Executors and Administrators: Estate and Gift Taxes." Page 26-27. Accessed April 30, 2020.
- Internal Revenue Service. "What's New - Estate and Gift Tax." Accessed April 30, 2020.
- Internal Revenue Service. "Estate and Gift Tax FAQs." Accessed April 30, 2020.
- Federation of American Scientists. "Recent Changes in the Estate and Gift Tax Provisions." Page 1. Accessed April 30, 2020.
- Center on Budget and Policy Priorities. "Ten Facts You Should Know About the Federal Estate Tax." Accessed April 30, 2020.
- Internal Revenue Service. "Instructions for Form 706: Time for Payment." Accessed April 30, 2020.
Carol Luther has published feature articles in print magazines, ghostwritten blogs, and produced digital content since 2007. She has published personal finance and small business articles for the Houston Chronicle, Mahalo, the Nest, USA Today, Wahm, and Zacks. Carol has designed, implemented and managed multi-year, multimillion-dollar domestic and international projects services for higher education, nonprofits, and small to medium businesses for more than 20 years.