From a tax revenue standpoint, this makes sense. If there were no rules about gifting, families would gift all of their assets to the next generation in perpetuity, and tax revenue would be significantly lowered. Instead, amounts in excess of the gift limit are subject to filing an annual gift tax form, explains a recent article from My Edmonds News, “Excess gift giving could cause a tax surprise.”
Any person may gift up to $17,000 to any individual within the calendar year 2023 without gift tax filing requirements. A married couple may gift up to $34,000 per individual. However, different rules apply if either or both spouses are not U.S. citizens.
Any gifts over these annual amounts are subject to potential gift tax reporting. The amount of tax is currently unified with estate taxes, and the maximum rate is 40%. The donor of the gift is responsible for paying any associated tax. When the amount of the annual gift-giving is exceeded, this triggers the need to file a gift tax form when you file your individual tax returns.
Any excess gift amounts are netted against your lifetime unified credit. As long as your lifetime gifts don’t exceed the credit, you may not have to pay an additional tax.
When could you face a gift tax problem?
College gifting. To avoid a gift tax problem, make payments directly to the college, since this form of payment can be excluded from the annual gift-giving limit as long as the funds are directed to be used solely for tuition. Have a conversation with the financial office to ensure you can document this. Funds for other expenses, like books, room, or board, will be considered gifts.
Funding 529 plans. Deposits into 529 accounts are considered gifts subject to annual gift-giving limits.
Medical expenses. It’s a great kindness to help a loved one with medical bills, which add up quickly. However, if you give money to the individual directly, you’ll create a gift tax obligation. Make payments directly to the health care provider for medical services on behalf of the patient.
Gifts to help with a down payment on a home. This can get tricky on several levels. Mortgage lenders look for recent deposits in bank accounts and will ask prospective buyers to substantiate the source of funds. In some cases, gifts may make the buyers ineligible for the mortgage. If the buyer says the funds are a gift, it may create a gift tax obligation to the donor.
Gift of real estate. If a property is given to a relative for little or nothing in return, you’ll need to file a gift tax form.
Remember, if you give a lump sum for the maximum amount to any one individual, you may not give them any additional gifts without triggering the need to pay a gift tax. For example, you give a grandchild a lump sum of $17,000 for college expenses, then send the family on vacation and provide generous birthday gifts. Combining these gifts is more than the annual limit and will present a gift tax event.
The IRS is paying attention to the massive non-compliance in the timely filing of the annual gift tax form, so be careful while you are being generous.
Stay informed, plan strategically, and consult with an experienced estate planning attorney when needed to ensure your gifting remains both generous and compliant.