Gift Taxes: Unwrapped
So you’ve got a bunch of extra money and are trying to decide what to do with it. Should you buy a pig farm and go off the grid, simply give it away, or do something else. Tough decisions, we know! Did you know that if you give it away, you may need to report that to the IRS?
Here’s what you need to know.
Who Needs to File?
In general, if you gave a gift to someone during the year that exceeded $15,000, you need to file Form 709 with IRS.
Gifts of future interest need to be reported regardless of the amount. These normally come into play in estate planning and might include certain life insurance policy premiums or the beneficiaries’ rights to future investment income, among others'
If a gift is made by both you and your spouse, you cannot file a joint return. Each spouse must submit their own Form 709. For reporting purposes, gifts are typically considered to be split equally between spouses. You and your spouse can give away up to $60,000 to a child and their spouse and still fall under the annual exemption limit. In this example, there are essentially 4 gifts of $15,000; one from you to child, one from you to child’s spouse, one from your spouse to child and one from your spouse to child’s spouse.
Exemptions from Filing
- The following gifts are excluded from reporting requirements:
- Gifts to your spouse,
- Gifts of present interest under the annual exclusion amount of $15,000
- Gifts to political organizations
- Gifts to certain exempt organizations
- Tuition payments made directly to an organization of higher education on behalf of someone else
- Medical payments made directly to the care provider on behalf of someone else
- Professional Tip: Do not give money to someone for their medical and/or tuition payments. Make those payments directly to the school or care provider so you can ensure the money is used as intended and that you meet the exemption criteria.
Do I Have to Pay Taxes on Gifts?
Maybe. It seems strange, we know. The good news is, unless your gifts exceed the lifetime exclusion of $10 million, you won’t have to pay any. Those that exceed this amount will be subject to rates from 18-20%. The IRS keeps track of the gifts made over your lifetime by way of your Forms 709.
Please understand that this has been a quick and dirty run down of the general rules that apply to gifts and is, in no way, to be taken as comprehensive. Also remember, there’s always that pig farm. The point is, there are many strategies to limit your tax exposure when it comes to estate planning and you should always consult with a professional to explore your situation.