Understanding the gift giving tax

excess gift giving and filing a gift tax returnThere are particular limits to the number of gifts one may give to any individual each year to prevent taxpayers from passing riches down generations tax-free. All sums in excess of this giving cap need the annual filing of a gift tax form. Most of us don’t need to worry about this, but it could be a big surprise when the tax payment is due if mismanaged.

Gift tax reporting

In 2023, you can offer any person up to $17,000 (up $1,000) without having to file a gift tax return. You and your spouse each have a $34,000 donation cap if you’re married. In addition, the yearly exclusion level for gifts given to a spouse who is not a citizen of the United States is $175,000.

Any gifts made over this annual cap are subject to gift tax reporting. The amount of tax is currently unified with estate taxes with a maximum rate of 40%. Ultimately, the gift’s donor must pay any associated taxes. You must submit a gift tax form and your individual tax return when you give more gifts than the allowed amount each year. The additional gift sums deduct from your lifetime unified credit. So you might only owe other taxes if your lifetime gifts exceed the credit limit.

Understand the gift-giving rule

Here are some scenarios where a gift tax issue might arise and solutions to the problem:

  • For college: Grandparents enjoy contributing to the enormous cost of paying for college, and the amount of money they give can easily exceed the annual gift limit. Consequently, consider making payments directly to the college to avoid the gift tax issue. This payment method can be exempt from the yearly gift-giving cap if the funds are not for books, room, or board.
  • 529 plan funding: Many people think about setting up a 529 college savings plan if their children plan on attending college. The savings plan can then be funded (or funded by someone else) on your child’s behalf. Remember that contributions to 529 funds are gifts, so the annual gift-giving ceilings still apply.
  • To cover medical expenses: It is very easy to accumulate a sizable medical debt. Although you may wish to assist by offering the person with the medical bills money, you may trigger a gift tax obligation. It is preferable to pay medical providers directly on behalf of the patient. Doing so would reduce gift tax exposure.
  • Helping with a down payment: More and more, families are lending their children money to put down a deposit on their first property. However, this can be tricky. Lenders will check for recent bank account deposits and request proof of funds from potential buyers. Giving the money to the couple as a loan might preclude them from getting a mortgage. Moreover, a couple claiming the money is a gift might result in the giver of the funds owing gift taxes. You must demonstrate that the contribution is within the annual amounts with a proper audit trail.
  • Real estate: You must also file a gift tax form if you send property to a relative with little or no compensation. According to recent IRS studies, almost 50% of taxpayers fail to disclose property transfers as gifts.

Avoid excess gift giving

  • You may provide gifts to or receive gifts from ANYONE. There are no constraints or limitations on whom you can give a gift to or who can give one to you. Giving thoughtful gifts can also be a helpful strategy for assisting someone in need without triggering a tax liability.
  • Do not give a lump sum gift for the maximum amount. If you give someone the maximum gift you are permitted, you cannot give them any more that year. In that case, it is excess gift giving, and you must file a gift tax form. For instance, a grandma sends her granddaughter $17,000 for college. She also buys a family vacation to Disney World and gives a lovely birthday present. The additional gifts technically exceed the annual cap and would result in a gift tax event.

The IRS is taking note of the widespread failure to file the annual gift tax form on time. It is actively investigating property transfers in some key states to verify that the gift tax filing is taking place. Your main takeaway from this tax advice should be when to file the gift tax form. If you need more clarification on have any questions, please contact our RRBB accountants and advisors.


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