Generosity might be a virtue, but the federal government might tax you for expressing it in the form of a gift. You won't get in trouble for buying lunch for a co-worker, but if you're going to make substantial gifts, you need to know how much you can give before you owe Uncle Sam a share of your largesse.
Annual Exclusion Amount
The annual exclusion allows you to give a certain amount to each person every year without making a taxable gift. The amount is indexed for inflation; for the 2017 tax year, it sits at $14,000 per year. The exclusion applies separately to each person you give money to during the year. For example, if you give $10,000 to your friend, your nephew and your neighbor, all three are under the exclusion, so you haven't made any taxable gifts.
In addition to the annual exclusion, you're allowed to give away a certain amount during your lifetime without actually having to pay any gift taxes. For the 2017 tax year, you can give away $5,490,000 before you start owing gift taxes. For example, say you haven't made any taxable gifts in the past. If you wrote your friend a $25,000 check in 2017, the first $14,000 would be covered by the annual exclusion, leaving an $11,000 taxable gift that requires you to file a gift tax return. But, since you haven't used up your lifetime exclusion, you don't actually owe the Internal Revenue Service. Instead, your lifetime exclusion drops from $5,490,000 to $5,479,000.
The IRS also exempts certain types of gifts from the gift tax entirely. You can give as much as you want to charity, political organizations and your spouse – if your spouse is a U.S. citizen – and not owe any gift taxes or use any of your lifetime exclusion. If your spouse isn't a U.S. citizen, you can still give up to $149,000 without owing or using your exemption. In addition, any medical or education costs you pay directly for someone else – by writing a check to a college for your nephew's tuition, for example – is also a tax-exempt gift.
If you're married, you and your spouse can each give up to the annual exclusion for each person and not have any taxable gifts. Through a mechanism known as gift splitting, either spouse can gift up to twice the annual exclusion and then have the gift treated as being made one-half by each spouse when you file your gift tax return. For example, say you give $20,000 to your friend. If you don't gift split, the last $6,000 is a taxable gift. But if you and your spouse agree to split, the gift is treated as being your contribution of $10,000 and your spouse's $10,000 share; both gifts are now under the annual exclusion.