With the IRS taking a sizeable chunk of money for every transaction, it makes sense that this would also include gifts of money, otherwise, you could simply transfer all of your wealth to someone else and avoid any additional costs.
As it stands the IRS takes a percentage of money over $15 000 in gifts, whether that be cash, properties, or any other assets that you want to pass on to someone else.
Though it may seem frustrating, gift tax does make sense, as it regulates income received in the form of gifts.
Don’t worry though! Whilst it can be tricky to give a large gift without having to pay the gift tax, there are ways you can do it. Below we will show you a few ways that you can avoid paying gift tax.
Gift Below The IRA Taxation Limit
In the simplest way, simply don’t give above $15 000 in one year to someone as a gift. This way, the person receiving this money will not have to pay gift tax on the amount given to them.
This amount typically changes from year to year, to keep up with inflation, so do check in on your yearly figures as they are prone to change over time.
As soon as you give over that amount, however, taxation will occur. It is also important to note that there is a lifetime gifting amount per person of $11.5 million.
Also, be aware that this annual $15 000 gift tax limit does not just include money. Cars, property, and any assets are counted in this monetary transfer which can cost if you go over that threshold.
If it’s your family or someone that you want to help out, whose partner you also want to help out, you can give each of them gifts up to the $15 000 a year limit.
This is great if you want to help out the family unit or gift money that you know would be used by both parties.
This is possible because married couples are treated as individuals, even if they file their taxes jointly.
This is also a rule that can be exploited if you want to give to one individual. If you are in a married couple yourself, you can both give the same person a $15 000 gift limit without incurring gift tax!
Again, this is because the state treats married couples as individuals in this respect regardless of whether or not they file the same taxes together or separately.
For example, if you as a married couple wanted to donate to your friend a large sum of say $60 000 in one year, you would be able to do this without incurring gift tax by doing the following – You can gift $15 000 to your friend, and additionally donate $15 000 to their spouse.
Your spouse could also donate $15 000 to your friend, and $15 000 to their spouse, all without incurring any gift taxation, so they can receive the whole amount that you want them to.
Paying For Educational Costs
One way you can gift money without it being subjected to gift tax is to use it for an educational institution.
Be careful to find out what additional costs this can include, but the main caveat is that the money from the donor must be paid directly to the institution such as the school or university, and not to the student.
What is annoying is that these gifts, sadly, cannot incorporate books, or schooling supplies, and are instead included in the $15 000 annual gifting limit.
This also wouldn’t include things like off-campus accommodation costs, or laptops as well.
Spreading Out Gift Giving Payments
The annual limit before the gift tax is $15 000. That means that if you wanted to give a larger sum of money, you could pay it over a few years and not incur any gift tax on that amount of money.
For example, if you wanted to give your daughter, or grandchild $25 000 for their 21st birthday, you could spread it over two years, giving $11 000 in one year, and $14 000 in another.
This is a great way to gift what you want without losing money to gift tax, maximizing the amount of money that you can give directly to your recipient.
With the cost of American medical expenses forever skyrocketing, there is an exception to gift tax restrictions if you are using your gifted money to pay directly for medical expenses.
For this to be counted, however, you must make sure that you are paying directly to the insurer or medical provider, rather than going through the receiver.
Any money given directly to them rather than the medical provider will still be subject to gift taxation.
Something like a nursing home for example can cost over $1500 for a year, so make sure that any money you are paying towards it goes through the nursing home itself or insurance provider to avoid any nasty tax surprises.
You need to keep below the $15 000 annual limits if you want to avoid losing any money to gift tax. But if you give to both your receiver and their partner, that could entitle you to give a $30 000 gift tax-free.
And, if you wanted to use that money for a specific medical bill or ongoing expenses such as a nursing home, which is a really big way that people want to help out their family and those close to them if they can, then these high costs are not included in the $15 000 annual limits.
When it comes to education, be sure what counts towards your gift tax allowance, and what you can pay directly to the institution to cover tuition fees.