If you are in the giving mood and want to help someone out financially with cash or merchandise, don’t let the fear of a large tax bill hold you back. In fact, chances are (depending on the size of the gift) there will not be any tax consequences at all should you decide to part ways with your wealth.
Generally, a transfer of property from one person to another where no cash or other monetary value is exchanged are considered a taxable gift for federal tax purposes. There are, however, three primary types of transfers that are not considered gifts according to the IRS: (1) gifts that are less than the annual exclusion, (2), tuition or medical expenses you pay for someone, and (3) gifts to your spouse.
The annual gift tax exclusion is an amount that anyone can give to another (or others) in a calendar year without it being considered a gift at all. In 2018, the annual exclusion is $15,000. A married couple can give $30,000 a year to a child (or anyone else) per year. The gifts can be made at once or in a series of payments over a year.
For example, a single parent could give a friend a car worth $15,000, two children $15,000 each, pay the $40,000 of tuition for another child to go to college, and $18,000 of medical expenses for a friend’s daughter all in one year without triggering any gift taxes.
What happens if someone gives away more than the $15,000 per person annual exclusion in a year? The amount over the $15,000 will eat into the donor’s lifetime gift tax exemption.
The lifetime gift tax exemption is the total amount that can be given away by an individual over his or her entire lifetime to any number of people that will be free from gift taxes. The lifetime exemption is currently $11,180,000 and is indexed for inflation. So, what happens if you give away $2,000,000 (over and above what you gave away in your annual gift exclusions) and then die? Your estate will have an additional $9,180,000 that will be exempt from federal estate taxes since the life time gift tax exemption and the federal estate tax exemption are the same amount. Estate and gifts exceeding this amounts will be taxed at 40%.
Taxable gifts, those above the annual exclusion, must be tracked and reported to the IRS on Form 709, United States Gift Tax Return.
Education and Medical Payments
There are also exclusions when it comes to paying for a child or someone else’s educational and medical expenses. There is an unlimited exemption from gift taxes as long as the payments are directly paid to a qualifying domestic or foreign educational organization and used for tuition only. Costs for books, room, board and other related items are considered a gift that may be offset by the annual gift exclusion.
Likewise, for medical costs to be exempt from gift taxes, the payment must be made directly to the care provider and meet certain requirements for diagnosis, cure, mitigation, treatment or prevention of disease among other things. The medical exclusion does not apply to amounts paid that are reimbursed by the donee’s insurance.
So if you are in the fortunate position to help out others, taking advantage of these gift exemptions just might be the way to go. Always consult a tax professional or financial advisor if you are not sure about your particular situation.