If you have given money, assets, or property to someone as a gift, you may need to file a federal gift tax return. Gifts can be tax deductible but only for a very certain amount of things.
Gifts are tax-deductible if they fall within the certain dollar limit determined yearly by the IRS. This limit is called the annual exclusion amount and this changes every year to keep up with inflation.
To keep up to date with the annual exclusion amount you can find the IRS form 709 instructions which list the annual exclusion amount for any given tax year.
If the gift you are giving is more than the annual exclusion amount, you may legally need to file a gift tax return.
However, there are some gifts that you don’t need to report at all and can be given with pre-tax dollars which therefore makes them tax-deductible.
You may not need to file a gift tax return if the gift was given to a charity or your spouse if you paid someone’s medical expenses directly to the medical provider, or their medical insurance, or if you paid for someone’s tuition fees directly to the school or university institution.
Say the annual exclusion limit is $15,000, that would be for one gift recipient for one year.
Your spouse counts as a separate entity and would also be able to have an annual exclusion of $15,000 per gift recipient per year.
The total that you can give as a gift to one person over the course of your life changes, but is around the $11 000 000 mark.
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Who Pays Gift Taxes?
The donor is generally the person responsible for paying gift tax. However, the donee can agree to pay the tax instead, but only under specially arranged circumstances.
If this is something that you are considering, speak to a tax professional.
What Qualifies As A Gift?
A gift is anything that is transferred to an individual either directly or indirectly where goods or services that are measured at the same money’s worth are not received in return.
For example, if a property was to change hands between a buyer and the seller and the seller gave the property at a much lower than fair market value price, this sale may incur gift tax.
This would stop a parent, for example, gifting property to a child without paying tax under the guise of a sale without having to pay the appropriate amount of tax.
You likewise wouldn’t be able to pay someone over the annual exclusion for the year for a service that didn’t estimate fair market value and try and pass it off as something else.
An example of this would be paying your friend or your grandchild $500 an hour for ‘filing’ at your company as a way to avoid paying gift tax.
This is considered tax fraud and if you can’t justify yourself to the IRS you could open yourself up to an audit, fines, and even possible prison time as this kind of thing is taken seriously.
Whilst the chances of an audit are slim for regular taxpayers, there are several things that you can do that will get you flagged and potentially trigger an IRS notice.
These red flags can include excessive write-offs compared to your claimed income, unreported earnings, and refundable tax credits, including sales that have questionable fair market value to the recipient.
What Is The Annual Exclusion For Gifts?
The annual exclusion amount for gifts changes yearly to keep up with the rise and potential fall of inflation.
The IRS form 709 states clearly what the annual exclusion amount for any given tax year is. Any gift amount that falls within this annual exclusion limit per recipient is not subject to gift tax.
There are also other ways that you can increase the amount that you give as a gift without having to pay gift tax.
Both yourself and your spouse (if you are married) are entitled to the full annual exclusion amount for gifts per person.
That means as a couple if you wanted to give a gift, you could both give the full annual exclusion amount without incurring gift tax.
Say you and your wife wanted to gift your friends, who are also a couple, a large present of $60,000 in one year.
You would actually be able to do this whilst still meeting the annual exclusion for gifts.
You would give the $15,000 annual exclusion amount to one donee and gift another $15000 meeting the annual exclusion amount to their partner.
Your wife would also be able to do the same thing to both parties and this would let you give a full $60,000 in one year, whilst still meeting the annual exclusion limits and not incurring gift tax.
Likewise, as stated above, you can also give gifts to someone in the form of paying for their medical expenses, their tuition, to a charity, or your spouse without interfering with the annual exclusion amount.
Until the Year 2026, there is an increased gift tax exclusion amount however after that date the exclusion amount is scheduled to drop to pre-2018 levels.
Final Thoughts
Gifts can be given in the form of money, assets, or property to someone as a gift up to a certain annual exclusion amount without having to file a federal gift tax return.
Anything over the annual exclusion amount will have to be stated in your tax return and will incur gifts tax.
However, this does not include gifts given to someone in the form of payment for a medical expense directly to an institution, paying tuition directly to an institution, giving a gift to charity, or giving a gift to your spouse.
Stay up-to-date on what the annual exclusion amount is by looking at the IRS website and finding the form 709 instructions list which will clearly state what is allowed in any particular year.
