Have you ever wondered whether or not you can give somebody a great deal of money without causing them to face certain repercussions from the IRS? When it comes to a family member, it isn't really all that uncommon for one person to decide to give another individual in the family a certain amount of money. In fact, it happens all the time.
It's often the result of parents who decide to give their children some money to help them get started in life after they graduate high school or college. That being said, this doesn't necessarily have to be the case. It's possible for anyone to give another person money if they choose to do so. In this particular case, we'll examine the amount of money that one family member can give to another without either of them facing text consequences.
Understanding the Rules of the IRS
There probably isn't a person alive that has ever thought the rules and regulations put forth by the IRS are easy-to-understand, not even for a second. Even professional accountants often struggle with keeping up with things.
This is largely due to the fact that the IRS tends to change their rules and regulations on an annual basis. In fact, they can change things so often that professionals who have been doing this for decades have to take courses each year in order to brush up on all of the annual changes.
If that's the case for someone who does this type of thing for a living, imagine what it must be like for someone who doesn't spend their entire day mired in tax forms. How are you supposed to know what you can and cannot do?
There's nothing simple about the majority of it, but in this particular case, the amount of money that you can give to a person is fairly cut-and-dried. That being said, there are some things that need to be discussed, so get comfortable. It’s important to fully understand what you're doing before you actually take any type of action.
How Much Can You Give Per Year?
According to the current IRS regulations, you can gift a family member up to $16,000 per year without you or the recipient being forced to pay any type of penalties on that gift. In order to keep things in order, you're supposed to report the money that you give any family member to the IRS on a special form. It probably won't surprise you that they have a specific form for such things, as they tend to have forms for literally everything. In this particular case, the form in question is Form 709.
Why does it matter if you fill out a form, especially if you're not going to face any penalties for gifting this money? It largely comes down to how much your entire estate is worth. More specifically, it's about the amount of taxes that you might owe on your estate. The IRS tracks the amount of money that you give to someone else each and every year and all of that is tied to your estate.
Watch the Value of Your Estate
Every time you give money to someone, they lower the overall value of your estate by the same amount, effectively making the amount of taxes that you owe for estate taxes less over a period of several years. By the same token, anyone that inherits your estate will also owe fewer taxes on the estate itself when these forms are properly filled out and submitted on an annual basis.
Is There a Lifetime Limit?
Technically, there is a lifetime limit of $12.06 million that you can give to another family member over the course of a lifetime. Keep in mind, you can certainly give more than this as a gift, but this will be the current limit if you want to prevent that particular individual from owing taxes on the amount of money that you have gifted them.
It should go without saying that this is the maximum amount of money that you can give to someone without forcing them to incur tax penalties, but it has to be distributed over a period of several years.
Let's say you give someone $12 million as a gift in a one-time payment. That individual would then end up owing taxes on the money that you have gifted them. However, if you take the aforementioned $16,000 a year and put that in an account specifically for that individual, you can continue to build on it year after year until you reach the maximum amount.
That individual can then take the money out immediately after it's been put into the account or leave it there and take it out after it has accumulated without owing any additional penalties.
Clear as Mud?
If all of this seems as clear as mud, don't worry. That's how most things seem when you start talking about taxes and tax penalties. In all actuality, the IRS does try to clear things up by publishing a pamphlet on the matter, Publication 559.
If you have any concerns that you might be doing something that could eventually land you in hot water, then it's imperative that you get this pamphlet and read it thoroughly. In fact, it might be a good idea to read it all the way through a couple of different times in order to make sure that you thoroughly understand it.
However, most people don't really need to worry about hitting the maximum limit. Unless you have several million dollars to spare, you're probably not going to be gifting someone else more than $12 million anytime in the near future. Obviously, that limit is for people who have more money than an average individual has to spend.
As a result, most individuals can comfortably give several thousand dollars to a family member as a gift on an annual basis without having to worry about paying any additional taxes. More importantly, the recipient can then receive that money without being penalized as well.
Who Reports What?
If you're like most people, you're probably wondering whether or not you need to report anything if you are a recipient of one of these gifts. Surprisingly, the IRS is typically only interested in having the person who actually gifted the money do the reporting.
This seems almost uncharacteristic for the agency, as they typically want everyone to report virtually everything. It's also worth noting that there are some additional caveats that everyone involved needs to be aware of.
This is where things stop being crystal clear and start getting a little more confusing. Let's say that both you and your husband want to give your child a significant amount of money for the year. Do you need to report it and if so, are you going to be required to pay taxes on it?
If it's less than $16,000, it's still a good idea to report it on the aforementioned Form 709 because it does have an impact on your estate taxes later on. However, there are people that give family members an amount less than this without filling out any forms.
In most cases, the IRS doesn't really care unless it's over the $16,000 limit. If you're talking about giving your child a significant amount of money between you and your husband, it's actually possible for both you and he to individually give up to $16,000 to that person in a single year without incurring any taxes whatsoever. In fact, you can do this for all of your children every single year if you wish.
Questions and More Questions
On the other hand, let's say that you both decide to give your child a car that's brand new and costs well over $16,000. Are you supposed to fill out a form and report that to the IRS? The answer is yes, you are. You would fill it out on form 709 and turn it in with your annual taxes. Does that mean that you will necessarily have to pay taxes on the gift?
Not necessarily. In most cases, things like this don't end up costing you more in taxes, just in more paperwork. The only way that you might end up paying additional taxes on something like that is if it's a luxury car that costs $100,000 or more.
In that case, you very well may end up paying taxes on it. Will the recipient have to pay taxes on it? Again, the taxes are almost always paid by the giver in these circumstances, not the recipient. It seems rather odd that the person receiving the gift can accept it tax-free, yet the person who is giving that money to someone else might end up paying taxes on it.
Nevertheless, this is basically the one time that things seem to be done in reverse when it comes to the IRS. Instead of paying taxes on money that you get, the recipient typically ends up getting to keep that money without any repercussions whatsoever. If anyone is going to pay taxes on it, it will almost always be the person that does the giving.
What if one of these gifts includes something such as a house that is used as a rental property? If the recipient plans on living in that house themselves, then it's highly unlikely there will be any additional taxes that need to be paid.
Although a Form 709 will most definitely have to be filled out by the individual giving the gift to another person. However, let's say that the recipient plans on renting that house to someone and then collecting the income on a monthly basis.
This is when the recipient will start to owe taxes on the amount of money that they're charging for rent each month. The same is true with virtually anything else that could potentially produce income. Think about dividends and additional properties that could potentially generate income. Any stocks that are gifted to another person also fall into this category.
Keeping Things Simple
In reality, most individuals can give a family member the money that they want to give them without needing to worry about the overwhelming majority of this information. This is largely because most people don't give their child a significant amount of dividends that could generate income, nor do they usually give to them rental properties that they can use to generate income on a monthly basis.
For the most part, your average individual who brings home an average income doesn't need to worry about any type of tax penalties because they're probably not going to be giving enough money for it to matter to the IRS.
An Estate Attorney Needs to be Present
In the rare cases where you're talking about someone who is gifting these types of things or who is going to go well over the $16,000 limit, there is almost always an estate attorney present to help people iron out the details. That way, everything can be kept in order because it is the job of the estate attorney to know exactly what is going on in terms of how much money is coming in versus how much money is being spent on these types of things.
The good news is that you can typically give your child or someone else in your family a rather substantial amount of money without having to worry about incurring any types of taxes as a direct result of that action. More importantly, you don't have to worry about the person you're giving the money to getting saddled with loads of taxes just because you did something that was meant to be a gift.
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Written by Allen Lee
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