Planning Large Family Holiday Gifts? Here's What You Need to Know About Gift Taxes
The holiday season is a natural time to start thinking about making large monetary gifts to family members. Whether your child gets engaged over the holiday season and you want to help pay for their wedding, another child is ready to buy a home, or you want to help fund a grandchild’s college education, your generosity can lead to tax consequences.
Let’s take a closer look at what you need to know about gift taxes so you can enjoy the merriness of the season without worrying about running into large tax bills.
What are Gift Taxes?
When someone transfers a large amount of wealth in the form of a gift, they can run into gift taxes. If you give more than $16,000 (or $32,000 a year if you’re married) in gifts to a single recipient you have to file a gift tax return. Many people can’t afford to give more than $16,000 in a year in gifts, but high-income earners like physicians may very well be able to do this.
It’s important to note that gift taxes don’t just apply to writing checks. For example, if you sell a property to a family member for substantially less than what the IRS considers to be the property's fair market value, then the difference between the sale price and the market value can be considered a gift. If that difference in price pushes you over the annual limit, you have to file a gift tax return.
How to Avoid Paying Gift Taxes
The good news is, that even if you surpass that $16,000 to $32,000 annual limit, you don’t necessarily have to pay the gift tax. While you have to file a gift tax return once you surpass the annual limit, you don’t have to pay any gift taxes until you meet the lifetime exemption. Individuals can give gifts of up to $12.06 million in their lifetime or $24.12 million if they are a married couple. So if an unmarried individual gives their child a gift of $36,000 in one year, that means the annual exclusion of $16,000 doesn’t apply to that lifetime exclusion, but the remaining $20,000 does.
It’s also important to note that some gifts are exempted entirely, such as gifts that:
Directly pay for medical expenses
Directly pay for education expenses
Go to a political organization to be used by that organization
Go to a spouse
Go to a charity
Unless you think you will surpass the lifetime exemption of $12.06 to $24.12 million, you really don’t need to worry about gift taxes. That being said, it’s still important to report any gifts over the annual limit to ensure your gifts are being tracked properly, so you don’t run into tax issues down the line.
Need help planning large gifts? We can help you plan your gifting while keeping gift taxes in mind.