Both methods and amounts of giving impact taxes.

What comes to mind when you think of gifting?

Do you imagine weddings, birthdays, and graduation?

Chances are you did not think of taxes.

According to a recent My Edmonds News article titled “Excess gift giving could cause a tax surprise,” gifting without strategy or thoughtfulness can lead to tax penalties.

Private education is an investment in the future.

Why?

The government wants your money.

If people could gift to loved ones with no tax penalty, families could keep their wealth intact for generations, and the government would never see a cent.

To address this, the federal government requires an annual gift tax form to be filed with your individual tax return for anything gifted above the annual exemption limit.

What are the limits?

In 2023, a person can gift up to $17,000 to another individual without the need to report the transfer on a Form 709 Gift Tax Return.

Married couples can gift up to $34,000 to each individual if both spouses are citizens of the United States.

Any amount in excess of these exclusions is subject to reporting for gift taxes.

Both gift taxes and estate taxes are currently unified.

The maximum rate for amounts in excess of the threshold is 40 percent.

Who is responsible for paying the taxes?

The person who makes the gift owes the tax rather than the receiver.

You may not have to pay taxes on these amounts if you do not exceed the unified lifetime credit.

What should you know about gifting and possible tax liability?

College gifting.

If you are giving education funds, you should pay directly to the university rather than to the individual.

These funds can be excluded from the annual gift limit by gifting to the college itself for tuition specifically.

When making these tuition payments, you should confirm the documentation of such payments for tuition with the financial office.

If you choose to pay for room, board, or books, these payments are treated as gifts.

Funding 529 plans.

Depositing funds into a 529 plan account is treated as a gift and is subject to the annual gifting limits.

Medical expenses. 

Although supporting a loved one by paying for medical bills is a kind gesture, these are treated as a gift if not paid directly to the hospital.

Because these expenses can add up quickly, you may find yourself with a gift tax bill.

Gifts to help with a down payment on a home. 

Lenders for mortgages will look at recent bank deposits prior to approving loans.

Often, they will ask those applying to confirm the origin of the funds.

As a result, your gift may disqualify your loved one from a mortgage.

If the home buyers state the money was a gift, you could also trigger gift tax liability.

Gift of real estate. 

When a person is not compensated adequately for the value of the property, a Form 709 Gift Tax Return will need to be filed.

Keep in mind the exclusion amount per individual is for the entire year and not for each lump sum.

If you gift the whole $17,000 at the start of the year for college tuition and subsequently make birthday gifts and payments for a vacation to the same individual, you will trigger a gift tax event.

The IRS is searching for non-compliance, so it is best to be thoughtful and strategic when giving.

Reference: My Edmonds News (May 22, 2023) “Excess gift giving could cause a tax surprise”