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Gift Taxes

What You Need to Know about the Gift Tax

Understanding gift tax rules and watchouts is important if you plan on giving money, making an interest free loan, or making another kind of asset transfer without getting anything in return. Knowing how the IRS will view these transactions can help you plan to minimize taxes and to avoid legal problems.

IRS gift tax basic concepts

The IRS has various rules for transactions that come under gift tax rules. Giving money to a child is a gift, but so is loaning them money and not charging them interest. In fact, the IRS defines any transfer of value from one person to another while receiving nothing in return as a gift. Your intent does not matter. Tax implications depend on the amount, timing, and nature of the transaction.

The IRS taxes any gift that has a fair market value that is over the basic exclusion amount (BEA). The amount of value you can give to someone in a year without incurring a gift tax is adjusted for inflation. You can give a person up to $17,000 in 2023 and up to $18,000 in 2024. In addition to the annual gift exclusion, the IRS has established a lifetime exclusion amount. In 2023 it is $12.92 million per person. For 2024, it is $13.61 million. The annual gifts you give a person add up over the years and count towards the lifetime exclusion.

You can give gifts greater than these amounts, but the person receiving them will need to pay taxes on them and you will need to fill out an IRS Form 709 declaring the value of your gift and who is receiving it. 

Gifts that you give to another person are not considered charitable donations, so you cannot deduct them from your taxes. You can pay tuition or medical expenses for someone else in any amount, known as educational and medical exclusions, without worrying about a gift tax or a gift tax form. You can also give money and assets to your spouse without limit. Political gifts are a topic all their own. 

Gift tax scenarios and complications

The implications for you and the people who receive gifts from you can have significant tax implications. The rules are sometimes complex, often change, and the dollar amounts are adjusted by inflation and by sunsetting estate tax provisions.

Keep track of gifts. You might think your estate isn’t worth that much, but you might inherit money, win the lottery, or get a large insurance settlement. Keeping track of how much you give to people will ensure you don’t incur tax liabilities or run into compliance issues. 

Fill out Form 709. Even if you don’t think you need to, it is a good idea to fill out Form 709 for each gift. It will help you with record keeping. You don’t want to miss filing the right forms at the right time. Technically, you can give less than $18,000 to 20 people in 2024 and not have to fill out a single form. If you give one person $18,001, however, you need the form. It’s best to file a form for everyone all the time. 

Who gives and who receives matters. If you want to help a child buy their first home and want to give them more than $18,000 in 2024, you can easily do so if you have a spouse and your child also has a spouse. The basic exclusion amount is per giver and per recipient. You can give a child $18,000. Your spouse can give that child $18,000. And you each can give your child’s spouse $18,000. That comes to a significant $72,000 a year.

Timing matters, too. Say you want to give your child more than that. You and your spouse can give your child and their spouse each $17,000 in December of 2023 for a total of $68,000 and then $72,000 in January of 2024. That comes to a gift of $140,000 tax free. You can make tax free gifts like this every year up to your lifetime exclusion.

Use a mix of gifts and loans. You can give your child more money right now with a loan. Using the example above, say your child needs more than $140,000 to make that house down payment. You don’t want them to have to pay taxes on the money. Give them the $140,000 we discussed above, spread across 2023 and 2024. Then you and your spouse have your child and their spouse sign notes for loans valued up to the basic exclusion amount for 2025. You can specify that payments of principle and interest payments will start in 2025. When 2025 comes around, forgive the loan. It then becomes a gift in the 2025 tax year.

Watch out for fair market value. If you give your house to your child, you need to account for the fair market value of that property. The IRS defines fair market value as the price the house would sell for on the open market. It is a good idea to have the house professionally appraised and to get more than one opinion. Special rules sometime apply, so professional tax help can also be worthwhile. 

Professional help for gift tax issues is a must

When giving money, making an asset transfer, or providing an interest free loan, you will be facing gift tax issues. Given the implications for your estate plan, compliance issues in filling out Form 709 and potentially others, and the impact on tax bills, it makes sense to speak to a tax professional.

Bernstein Financial Services Inc. has guided business owners through the complexities of the tax code and improved their profit margins since 1989. This article is for educational purposes only and should not be taken for business advice about your specific situation.