Know the rules before you gift

Welcome back to Coffee & Cash!

We are often asked by clients; how much can I gift to my kids? Although technically the answer is “unlimited”, to be sure to stay in compliance with IRS rules as well as thoughtfully consider tax implications, it is always important to know the rules.

Let’s talk today about the basics of gifting…and who knows, maybe it will inspire some listeners to reconsider gifting as not only something that feels good, but something that might also be a strategic part of the estate planning process.

For this year, the IRS has increased the level of tax-free giving that any individual can gift to another from $15,000 to $16,000. This means that if you are married, you and your spouse could gift a single child or person, a combined total of $32,000 without it be a tax reportable transaction.

Keep in mind that if you for example you had three children and wanted to gift to each, you could give that same amount to each without tax! Which in total could be upwards of $100,000.

So, what if you wanted to give more than this annual amount to a single person, then what?

Well, there are two ways to go: one, you could file a form 790 and report the amount above the annual limit and it would be considered taxable.

Or you could report the added amount on your taxes but mark it as applied to your “lifetime gift tax exemption.” Incase you have not heard this term before, each of us have a lifetime allowance for gifts, which currently is set at  approximately $11 million dollars.

Thereby when you record a larger gift, it allows the IRS to track and tally your gifts to ensure that over your lifetime you have not exceeded that limit and would then owe tax on the gift.

Keep in mind that this lifetime exemption level can and does change. And currently is set to reduce  to around $6 million in 2026. So if you are a large gifter, you will want to stay informed to changing levels.

And, if you are thinking of not even reporting a gift, an IRS audit may prompt you to owe.

When gifting, only the donor has the potential to owe taxes, not the recipient of the gift.

Also, it is not only gifts of cash that fall under this rule, so gifts of property, or other assets or investments could also prompt tax implications and filing requirements. So before you gift you will want to investigate the fair market value of the gift to help inform how you will report and whether you will need to leverage your lifetime gift exemption when reporting the gift.

One last note, there are a few things that do not actually count as gifts:

1.       Obviously, any item or amount at or below the gifting value limit

2.      Tuition or medical expenses you may have paid for another person

3.      Gifts to a spouse

Lastly, political contributions or gifts to public charities are not taxable.

Gifting can be a big part of the planning process not only to charitable organizations, but to family or others. It is critical to talk with your financial advisor, accountant or even an attorney to understand all the rules and implications of what your gift, form where you gift and to whom you gift.

As always, we thank you for joining us today and welcome new ideas and questions that we can turn into a video. Thank you have a great week!