Everything You Need to Know About the Gift Tax

Receiving gifts of cash is usually something that most of us welcome instead of a gift that either doesn’t fit right or is not something that you can even use. There has long been an argument over giving cash as gifts with some believing that it is an easy out that doesn’t take an effort but there are those of us who welcome cash over a “thoughtful” gift that totally misses the mark. While most cash gifts aren’t large enough to matter on tax forms, some of the larger ones can make a big difference. The IRS has an entire set of rules that is dedicated to cash gifts and if you’re planning to give a large cash gift or if you’ve received one, here is everything that you need to know about the Gift Tax.

What the IRS defines as a gift

This information is found in the IRS Publication 559 and it clearly defines what they consider to be a gift.” It is something that is made of tangible or intangible property which includes money. It also includes the use of property or the right to receive income from property an it is given to the recipient without the expectation of receiving something that is of equal value in return”.

Money given by friends or relatives

If a family member gives you a gift of money to help pay bills, or if they gift an automobile, furnishings, use of a home or if they invest in your business to help you get started, these things are considered a gift. This also applies if you owe a debt and it is forgiven.

The difference between a gift and charity

If you give money or anything of value to a charity, you can itemize this on your deductions when you file your taxes. When you give a gift to an individual, you cannot use it on your taxes because they are not deductible. You cannot claim a gift on your taxes and the recipient of the gift does not need to claim the gift as taxable income.

How the gift tax works

Gift taxes rarely occur but under certain circumstances, they must be paid by the person who gave the gift. The IRS has established a federal gift tax exclusion amount and if you give a gift that exceeds the amount, you as the giver will need to pay taxes on it. The yearly exclusion amount is currently set at $15,000. This amount applies on a per person basis and not on the total of gifts given so if you give ten people $14,999 you won’t need to pay the gift tax.

What happens if you give your child $16,000 for the down payment on a house?

If you help any one person, even family members with an amount that exceeds the yearly exclusion amount of $15,000 you are required to use Form 709 and you will be charged tax on the gift that you bestowed. It gets even better. If you are married and you live in a community property state, then each of you will be required to file the 709 form because the IRS considers that each of you have given the gift and you’ll each pay taxes on half of the gift.

The lifetime exemption clause

The lifetime exemption is a special clause that might make it possible for you to avoid the need to pay a gift tax. Anyone who gives a gift can subtract the gift that goes beyond the annual exclusion from what is called their lifetime exemption amount, making it possible to totally avoid ever being required to pay taxes on the gift. The lifetime exemption in 2018 was set at $11.18 million and this makes it unlikely that the average person would ever need to pay taxes on a gift. The very wealthy, however will need to be aware of the amounts to ensure that they don’t exceed the lifetime exemption amount. The amount of the tax can vary widely in accordance of the amount of the gift starting at 18% and going all the way up to 40%.

A drawback for using the lifetime exemption

When you use the lifetime exemption to avoid paying gift taxes, you are reducing the amount that you will be able to exclude from the federal estate tax on your estate when you pass away. Again, while the average citizen won’t need to worry about it, if you have assets that are worth more than 11.18 million it could make a difference.

What about paying for education?

You can relax when it comes to paying for your child or another person’s tuition for education. Even if the amounts that you gift exceed the exclusion amount, it is not considered a gift, but this definition only applies if you pay the money for tuition and fees directly to the institution.

Helping with health costs

If you decide that you want to help someone pay for their medical expenses or hospital bills, it may be considered a gift if you pay the money directly to the individual. The way to get around this is to pay the health care provider or facility directly. The IRS does not consider this to be a gift.

Political contributions

When you make a donation to a political organization you may do so without being charged any gift taxes. The IRS does not consider this to be a gift, but you still can’t deduct the contributions on your return. At least you won’t be charged a gift tax for them.

Final thoughts

Although most of us will never end up paying gift taxes it’s good to know the rules about them. Under some circumstances you may need to enact the lifetime exclusion. If you’re going with a tax preparer who is in training and not aware of this rule, it’s a good thing if you do.


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