No one likes to receive a gift only to find out that it will cost them something to get it. The good news is that different from any other form of income, the IRS doesn’t tax the person receiving the gift; instead, the tax burden falls to the person giving the gift.
Nearly 100 years ago, the IRS established a gift tax as a deterrent for people trying to minimize their incomes and estate taxes by giving everything away. Although over time, the gift tax has changed in its specifics, it has stayed true to this principle.
Understanding Gift Limits
When you’re considering making a gift, there are two key aspects to the gift tax to which you must pay attention. For 2020 (and 2021) these are:
- An annual limit of $15,000.
- A lifetime limit of $11,580,000.
If you’re married, both you and your spouse can each give $15,000 to the same person for a total of $30,000 before needing to notify the IRS. Similarly, the lifetime limit is effectively doubled ($23,160,000) for a married couple.
There is even more gift-giving freedom when you consider that the $15,000 limit is calculated per donee, not cumulatively. So, if you have three friends to whom you want to give gifts, you can give up to $15,000 to each before you incur tax.
Exceeding the Limit
If you exceed the $15,000 limit, you must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. This form documents the gift and maintains a running total of gifts adding to the lifetime limit.
Exceptions to Gift Giving Rules
For most people, these limits give a lot of latitude for gift giving before having to worry about actually paying any taxes. Giving your child two front row tickets to the symphony, treating your friends to dinner or taking your grandchildren to Disneyland aren’t going to cause you to pay a gift tax. And there are some exceptions that make gift giving even more tax favorable. These include:
- Giving to a tax-exempt charitable organization. Most recognizable charitable organizations, such as The American Heart Association, The Boy Scouts of America, The Kiwanis and thousands of others, have applied for and have been given a tax-exempt status. They are also known as 501(c)(3) organizations. There is no limit on gifts to these organizations as they aren’t taxable; instead, gifts to charitable organizations are tax deductible. However, there are various limits on the deductibility depending on the form of the gift.
- Payment to a university for college tuition or to a hospital for medical treatment on behalf of someone else. These are not considered gifts.
- Gifts to your spouse. These are not considered gifts as defined by the tax code.
- Payments to political organizations. These too are not considered gifts.
Other Tax Considerations
As taxpayers age, a good strategy to avoid paying tax is to start the transfer of wealth early with annual gifts at the maximum $15,000 (or $30,000 for a married couple) threshold. In the event there is a major need, such as the down payment on a home, you can make back-to-back payments on 12/31 and 1/1 without tax implication. If timing doesn’t allow a slow transfer of wealth within the annual $15,000/$30,000 limit and these are exceeded, then you will need to file the Form 709, but unless you have reached the lifetime limit, no tax payment will be triggered.
Taxpayers with significant wealth should consult with tax specialists to carefully develop plans to minimize wealth-transfer tax.
Gifts of Stock or Property
There are a number of complications with gift giving that you should consider. Giving stock or real estate are good examples and have similar and different implications.
When giving stock, to determine if the $15,000 or $30,000 annual gift threshold is exceeded, the value of the stock when you purchased it (the basis) is used, and not the fair market value. If the recipient then sells that stock (immediately or later), they will recognize capital gain or loss as appropriate by subtracting the sale price from the donor’s original cost basis. However, the tax treatment for a gain will be considered long term or short term based on when the gifted stock was received, not when the donor purchased the stock.
When giving real estate, the tax implications vary markedly depending on whether the gift of property is partial or full ownership, or whether the property is gifted but with the donor continuing to occupy the property for life. The implications of these variations should be analyzed carefully with the help of appropriate tax specialists.
Determining Gift Values
While the value of cash gifts are easily determined, in the case of gifts of property, such as jewelry, coins, artwork, patents, copyrights, trademarks and other real or intangible property, determining the value is more complicated. Depending on the value, you should consider working with appraisers and tax accountants and/or tax lawyers to insure the proper documentation and tax treatment is followed.
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- Treasury.gov: The Federal Gift Tax: History, Law and Economics
- IRS.gov: The Gift Tax
- IRS.gov: Frequently Asked Questions on Gift Taxes
- IRS.gov: Form 709
- IRS.gov: Instructions for Form 709
- Block Advisors: Property Family Transfer – What You Need to Know...
- Charles Schwab: Sharing the Wealth: How Lifetime Gift Tax Exemption Works
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Alan Kearl has overseen the commercial, operations and finance areas at the C Level for several leading beauty industry brands. He is a board member, a business consultant and writer. He has an undergraduate degree in Economics from Brigham Young University, and an MBA in Finance from the Krannert School at Purdue University. He's recently been published by Business Insider. You can connect with him on LinkedIn.