The IRS Gift-Giving Rule
You may give up to $17,000 to any individual (donee) within the calendar year 2023 without filing a gift tax return. If married, you and your spouse may transfer up to $34,000 per donee. If you provide a gift to your spouse who is not a U.S. citizen, the 2023 annual exclusion amount is $175,000.
Gift Tax Reporting
Amounts in excess of the annual limit are subject to gift tax reporting on Form 709. Form 709 is an information return that tells the IRS you gifted more than the annual exclusion amount to a recipient. These gifts reduce your lifetime unified credit ($12.92 million for 2023). After you exhaust your lifetime exclusion, you may begin to owe gift taxes.
Common “Gifting” Dilemmas
Here are some special gift tax situations and ways to manage the problems:
- Gifts for college. Some grandparents like to help out with the tremendous expense of funding a college degree, and amounts donated can quickly surpass the annual gift threshold. To avoid the gift tax problem consider making payments directly to the college as this form of payment can be excluded from the annual gift-giving limit as long as the funds are not used to pay for books, room or board on behalf of the donee.
- 529 plan funding. Many parents open a 529 plan in anticipation of their children attending college in the future. Some states even offer tax incentives for 529 plan contributors. Anyone is welcome to then fund the savings plan on behalf of the child. However, deposits into 529 accounts are considered a gift and are subject to the annual gift-giving limits. Special 529 rules allow you to make a lump sum contribution of up to five times the annual gift tax exclusion and spread it out over five years. For 2023, single taxpayers can contribute $85,000 tax-free to a 529 plan and joint taxpayers may fund $170,000. This may affect your ability to make additional gifts to these individuals, so it is important to consult with your tax advisor first.
- Help cover medical expenses. While you may want to help a loved one alleviate a large medical bill, giving them cash could trigger a gift tax obligation. Instead, make payments directly to health care providers for medical services on behalf of the patient to avoid gift tax exposure.
- Contribute to a down payment. It is becoming more common to have family members help with the down payment on a first home, but this can be tricky. Lenders will examine bank account deposits and ask prospective buyers to substantiate the source of funds. Providing the funds as a loan may disqualify the couple from taking on the mortgage. If the purchasing couple claims the funds are a gift, this action may create a gift tax obligation. Care must be taken to provide the correct audit trail to prove the gift does not exceed the annual amounts.
- Gifting real estate. Giving property to a relative for little or nothing in return generates the need to file a gift tax form. Recent IRS studies suggest over 50% of taxpayers fail to declare property transfers as gifts.
Other Considerations
- You may provide gifts to or receive gifts from ANYONE. There are no limits or restrictions on who you may give a gift too or who may provide a gift to you. Creative gift-giving can be a useful tool to help someone in need without creating a tax obligation.
- Avoid giving a lump sum gift for the maximum amount. If you provide a gift for the maximum allowable to an individual, you technically may not provide any other gifts to this person during the year or that event would be deemed excess gift giving and require filing a gift tax return.
- Consult with a CPA. The IRS is paying attention to non-compliance in filing gift tax returns. So much so, that the agency is actively researching property transfers in key states to ensure gift tax filing is taking place. In addition, giving away money or property can affect your eligibility for Medicaid so there is much to consider when making gifts. Turn to your tax advisor for guidance on gifting, and careful estate and tax planning strategies.
