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A gift—no matter how large or small—can have a profound impact on the people we love. If anything, the holiday season inspires us to make those kinds of profound impacts.
You may have a newly minted driver in the family who needs a car. Or you may have a budding college student who could use some help with their tuition this semester. You might even consider a no-strings-attached lump sum for a relative or acquaintance who’s fallen on hard times in life.
Whoever they are and whatever you’re giving, chances are good that you have some concerns about the Grinch in the room: the infamous gift tax. But when does the gift tax trigger? To what gifts does it apply? Just in time for the holiday season, we’ve got a guide to the gift tax to help you make sense of it all.
Gift tax returns are triggered after a certain value in gifts per recipient is given during a calendar year. The total value of the gift(s) in question has different limits for individuals and spouses when giving to others.
Value limits per recipient for the 2021 calendar year:
- For an individual – $15,000 per recipient
- For a married couple – $30,000 per recipient ($15,000 each)
Gifts given within a calendar year that exceed these sums will trigger a gift tax return. However, unless you’ve given more than the lifetime exemption amount ($11,700,000), chances are good that you won’t owe any additional taxes on your gift. You will, however, need to file a gift tax return. To be entirely clear: unless you’ve given gifts exceeding $11,700,000 in value up to this point in your life, you likely won’t owe additional taxes on your gift.
There are, however, exceptions to this general guideline. Married couples especially need to be careful structuring their $30,000 gift to avoid triggering a gift tax return. An additional consideration is if the asset gifted generates income subsequent to the gift, the recipient will be liable for the income tax on that income.
For spouses, there are two ways to ensure that your joint gift avoids triggering the gift tax return.
- Joint Account – A married couple may write one check from their joint checking account for $30,000. Since the gift is deemed to be made half by each spouse, they are below the filing threshold.
- Individual Checks/Contributions – If the married couple has separate bank accounts they wish to use for the gift, they would each write a check for $15,000. But if one spouse makes a gift of $30,000 or less from a bank account that is not jointly shared with a spouse, a gift tax return is triggered. However, if both spouses agree, then an election can be made on the gift tax return to split the gift.
There is good news, however, when giving gifts between spouses. There are no current total value limits to gifts between spouses who are both US citizens. No matter how large, gifts from one spouse to another do not trigger the gift tax return, nor do they apply to the total lifetime exemption amount. Note that some exceptions to this rule apply when gifts to spouses are made in trust. So if this is applicable to your gift, be sure to consult an estate and gift tax expert.
Exceptions & Pitfalls
As individuals just trying to do something nice during the holiday season, it can sometimes be difficult to determine what the IRS does or doesn’t consider a gift. There are certain exceptions and pitfalls that may trigger or avoid a gift tax return.
A gift to an individual for tuition and medical expenses are exempt from gift taxes. To be eligible for this exemption, the gift must be made directly to the provider and only for qualified expenses.
A grandparent may pay for private school or college tuition as long as the payment is made directly to the school or university. In this example, the grandparent needs to make sure that they’re only paying for tuition and not other, non-qualifying costs such as room and board or activity fees.
One common pitfall is remembering to include non-monetary gifts when calculating the total given within a calendar year. These include any items/assets given as birthday, anniversary, or holiday presents.
Any gift with monetary value (cash or otherwise) to an individual not your spouse will count toward the $15,000 annual limit. This includes cars and several other common coming-of-age gifts. Allowing someone to live in a property you own without paying rent is also considered a gift. Fair rental value will have to be taken into consideration when calculating the value of rent-free arrangements. Support of minor children or dependents, however, is not considered to be a gift.
At the end of the day, a gift tax return rarely requires additional taxes to be paid. Ultimately, even giving more than the $15,000 (individual) or $30,000 (spousal) gift limits each calendar year boils down to submitting additional paperwork. Unless you’ve been fantastically generous up to this point, giving more than $11,700,000 , there’s likely no need for alarm.
Exceptions, split hairs, and IRS reasoning abound, however, and we should never be too cavalier about our finances. If you’re considering making profound impact with a large gift this holiday season, you might also consider consulting a CPA who specializes in estate and gift tax issues to cover your bases and make the most of your generosity.
Aldridge Borden can help you make a profound impact.
Gifts of all sizes certify something important between people who care for one another. If you’re looking to make a real difference in the life of a loved one or acquaintance this holiday season, it may be wise to consult an expert CPA at Aldridge Borden before doing so. To learn more about the gift tax and where it does/doesn’t apply, contact us or call (334) 834-6640 today! Don’t let the Grinch dissuade you from making a profound impact this holiday season.