Unwrapping gifts from your parents may trigger the same excitement for you as an adult as it did when you were a child. But whether you’re the parent who gives or the child who receives, the tax consequences may pleasantly surprise you. The Internal Revenue Service cuts a wide swath in its definition of a gift, but it also eases the burden on taxpayers by allowing them exclusions from paying taxes for many of these gifts. Another benefit is that tax laws apply equally to family gifts as well as non-family gifts.
What Does the IRS Consider as a Gift?
“Gift” covers a lot of terrain in the tax world. The diverse spectrum of gifts runs from a piece of jewelry to a property easement. For tax purposes, the IRS considers a gift to be any transfer of real or personal property that does not result in reimbursement or in-kind compensation. Real property includes immovable items, such as a property easement, and personal property includes portable items, like jewelry.
Is Money Considered a Gift?
Money will be considered a tax-free gift if it fulfills the IRS definition of a gift as a transfer of personal property that is not a payment for something exchanged for it, such as goods or services. Monetary gifts must include a “present interest,” which allows the recipient to have immediate access to the money. You can’t give a monetary gift with a “future interest” that carries the condition of waiting for a certain date before the funds are released. If you have a joint bank account with someone who is authorized to withdraw money from it, any deposits you make into the account are not considered gifts to the other person simply because his or her name is on the account. But if the other person withdraws money you have deposited without having to reimburse the account or otherwise repay you, the money becomes a gift as soon as it’s withdrawn.
Are Gifts Tax-Free?
For the majority of taxpayers, most gifts are indeed tax-free. If you’re the recipient of a gift, you won’t have to pay taxes on it regardless of its value, because gifts are not considered income. If you’re the giver, it depends on the value of your gift. The IRS sets tax-free limits on the value of certain gifts. These limits are called exclusions because the gifts are excluded from being taxed.
What Are the Maximum Tax-Free Gift Limits?
The tax-free gift limits, including money, cover three categories:
- Annual Gift Tax Exclusion. For tax year 2017, each taxpayer is allowed to gift up to $14,000 per person without paying taxes on the gift or even reporting the gift on a tax return. Married couples can give up to $14,000 each, for a total of $28,000. If you’re married with four children, you can give each child $28,000 ($14,000 from each parent). The collective $112,000 ($28,000 for each of four children) does not have to be reported on either parent’s tax return. But you can also give as many people as you want up to $14,000 each year, whether they’re related or not. If you give more than $14,000 to someone during the tax year, you do have to report any amount over the $14,000 on IRS Tax Form 709 United States Gift (and Generation-Skipping) Tax Return. Even though you have to report a gift that exceeds the amount of the annual exclusion, you only have to pay taxes on it if you exceed another amount – the lifetime exclusion.
- Lifetime Gift Tax Exclusion. Over the course of your lifetime, you’re allowed to gift up to $5.49 million tax-free in tax year 2017. If you’re married, this amount doubles to $10.98 million ($5.49 million from each spouse). This multimillion-dollar gift allowance does not include the separate annual exclusion of $14,000 – only amounts you give over $14,000 per person each year are counted toward the lifetime exclusion.
Unlimited Gift Tax Exclusion. Some gifts carry an unlimited tax-free benefit. This means you can give as much as you choose, to as many people as you choose, without having to pay taxes on these gifts. The instructions for Form 709 list these gifts and their qualifications for unlimited tax exclusion. For example, you can pay someone’s qualifying medical bills as a tax-exempt gift as long as you pay the medical provider directly. You can also pay tuition for someone, if you pay the educational institution directly,
but you can't buy books and supplies under the unlimited exclusion. You can pay any educational or medical costs that don’t qualify for the unlimited gift tax exclusion with your annual exclusion.
Can You Make a Tax-Free Gift to a Spouse?
A notable exception to the annual and lifetime gift tax exclusions is gifting your spouse. You can make unlimited tax-free gifts to a spouse who is a U.S. citizen. If your spouse is not a U.S. citizen, you're allowed an annual tax-free gift of up to $149,000 if $135,00 of that (the amount over the annual exclusion of $14,000) meets the qualifications for the gift tax marital deduction. These qualifications are included on Form 709.
Can You Itemize Gifts as Tax Deductions?
If you give to IRS-qualified charities, you can list those gifts as tax deductions. But you can’t include other gifts in your itemized deductions. IRS Publication 526 Charitable Contributions lists the qualifying charitable organizations. Examples include Goodwill Industries, The Salvation Army, the American Red Cross, churches and other religious organizations. Give directly to a qualifying charity instead of paying a third party so you can ensure your contribution meets the requirements of a legal tax deduction.
Filing a Gift Tax Form
Each taxpayer must file an individual gift tax return; spouses cannot jointly file this particular return. Report any amount you gifted to any one person that’s over the annual exclusion of $14,000 on Form 709 and include Form 709 with your annual income tax return. The filing deadline for Form 709 is the same as your income tax return, and you’ll report gifts in the year following the year in which you actually made the gifts. If you need to file an extension for your tax return, Form 709 is automatically given this same extension. When you list the gifts you made in a tax year on Form 709, adequately disclose the nature of the gifts. Examples of Form 709’s disclosure instructions include providing descriptive details and including copies of appraisals or other paperwork to substantiate the transfer of your gift.
- IRS: Frequently Asked Questions on Gift Taxes
- IRS: 2017 Instructions for Form 709
- Charles Schwab: Tax-Free Limits – How Much Money Can You Give?
- Forbes: IRS Announces 2017 Estate and Gift Tax Limits – The $11 Million Tax Break
- IRS: Publication 526 Charitable Contributions
- IRS: Form 709 – United States Gift (And Generation-Skipping Transfer) Tax Return
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