In an effort to keep taxpayers from transferring wealth from one generation to the next tax-free, there are specific limits on the amount of gifts you can give to any one person each year. In any yearthat you give more than the limit, you have to file an annual gift tax form.
The Gift Giving Rule
You may give up to $17,000 (up $1,000 from 2022) to any individual (donee) within the calendar year 2023 and avoid any gift tax filing requirements. If married, you and your spouse may transfer up to $34,000 per donee. If you provide a gift to your spouse who is not a U.S. citizen, the annual exclusion amount is $175,000 for 2023.
Gift Tax Reporting
Amounts given in excess of this annual amount are subject to potential gift tax reporting. The amount of tax is currently unified with estate taxes with a maximum rate of 40%. The donor of the gift is responsible for paying any associated tax. When you exceed the annual gift giving amount, this triggers the need to file a gift tax form. The excess gift amounts are netted against your lifetime unified credit . If your lifetime gifts do not exceed the credit, you may not have additional taxes owed. Here are some instances when a gift tax problem may occur and ways to manage the problem:
• Gifts for college
Grandparents like to help with the tremendous expense of funding a college degree and amounts donated can quickly surpass the annual gift threshold. To avoid the gift tax, consider making payments directly to the college as this form of payment can be excluded from the annual gift giving limit AS LONG AS the funds are not used to pay for books or rooming on behalf of the donee.
• Be careful with 529 plan funding
If your children are anticipating going to college, many consider creating a 529 college savings plan. You may then fund the savings plan (or have someone else fund it) on behalf of your child. However, remember the deposits into 529 accounts are considered gifts and are subject to the annual gift giving limits.
• Gifts to cover medical expenses
In the event that your relative has accumulated a large medical bill, you may decide to step in and help by giving money to the individual. In this case, you may be creating a gift tax obligation. To avoid gift tax exposure, make payments directly to health care providers for medical services on behalf of the patient.
• Gifts to help make a down payment
Helping a family member with the down payment on a home can be tricky. Lenders will look for recent deposits in bank accounts and ask the prospective buyers to substantiate the source of funds. Providing the funds as a loan may disqualify them from taking on the mortgage. Even worse, if your relative were to claim the funds are a gift, this action may create a gift tax obligation to the person providing the funds. Care must be taken to provide the correct audit trail to prove the gift does not exceed the annual amounts.
• Gift of real estate
If you give property to a relative for little or nothing in return, this generates the need to file a gift tax form as well. Recent IRS studies suggest over 50% of taxpayers fail to declare property transfers as gifts.
Other things to consider
• You may provide gifts to, or receive gifts from, ANYONE. There are no limits or restrictions on who you may give a gift to or who may provide a gift to you. Creative gift giving can be a useful tool to help someone in need without creating a tax obligation.
• Do not give a lump sum gift for the maximum amount. If you provide a gift for the maximum allowable to an individual, you might end up unintentionally giving in excess of the annual exclusion. Then you would be required to file a gift tax form for the year. For example, a grandmother gives $17,000 to her granddaughter for college. She also pays for a vacation trip to send the family to Disney World and provides a wonderful birthday gift. Technically, the additional gifts are in excess of the annual limit and would present a gift tax event.
The IRS is paying attention to the massive non-compliance in the timely filing of the annual gift tax form. So much so, that it is actively researching property transfers in key states to ensure the gift tax filing is taking place.
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