Whether you’re giving money as a gift to an organization, individual or family, it’s important to know the ins and outs of the process. It might seem straightforward, but there are a number of things to consider before you give a monetary gift, including taxes. Depending on the size of the gift, your tax obligation could be impacted, in addition to that of whoever or whatever you choose to give money. Gifts under the 2021 gift tax exclusion of $15,000 won’t be of any interest to the IRS, but there are still things to prepare for when it comes to giving monetary gifts. Consider speaking with a financial advisor about the specifics of your situation.
Tax-Free Monetary Gifts
It’s a little anticlimactic, but most of the monetary gifts you give are unlikely to need any second thought from a paperwork or tax perspective. This is largely due to the IRS gift tax exclusion. This exclusion currently sits at $15,000 per person, but is subject to change year over year. That means you can give up to $15,000 in monetary gifts to as many people as you want without needing to file a return or pay taxes on it.
Giving monetary gifts under the gift tax exclusion is pretty straightforward. You can give money any way you like, whether that’s by cash, check, gift card or any other medium.
It’s also important to note that the rules vary slightly for couples. Married couples can give gifts on behalf of themselves as a unit, doubling the exclusion. So a married couple can give up to $30,000 in tax-free monetary gifts to as many individuals as they want, including children.
Taxable Monetary Gifts
If you’re going to give a monetary gift over the gift tax exclusion limit of $15,000, you’ll need to file a return with the IRS. But don’t worry quite yet. There is a lifetime gift tax exclusion that currently sits at $11.7 million. If you eclipse that, you’ll owe taxes of up to 40%. But if you stay beneath that lifetime limit, you won’t actually owe any tax on gifts above $15,000 each year. You’ll just need to file a return so that the IRS knows if you’re beneath the lifetime exemption.
Note that the lifetime exclusion will drop to $6 million in 2026. However, those taking advantage of the current gift tax limit won’t be adversely affected when the limit decreases once again.
As a result, avoiding taxes while giving monetary gifts is a lot more straightforward than you might think. If you stay under the annual exclusion amount, you won’t have much to worry about. Even if you go over the annual exclusion, you won’t owe gift taxes until you hit the lifetime exclusion.
While it’s a bit easier to keep track of monetary gifts and keep them under the annual exclusion, remember that other types of gifts factor into the lifetime exclusion. Don’t lose track of the lifetime gift tax exemption by ignoring gifts of real estate and other non-monetary assets. If you do, this can affect your estate plans after your pass away.
Gift Tax Exceptions for Monetary Gifts
Keep in mind that you can technically give tax-free monetary gifts over the exclusion amount, depending on how you do so. For example, if you want to give a gift of college tuition or covering medical bills, you can do so tax-free if you pay the institution directly. However, if you give a $50,000 check to a friend so that they can pay their college tuition, you’ll be subject to the gift tax for being over the $15,000 exclusion because you’re giving the money to the individual and not making a payment directly.
There’s another education-based exception to paying tax on monetary gifts. Currently, tax laws allow you to spread out a contribution to a 529 plan over five years. This means that you can make a gift of $75,000 ($150,000 as a couple) in one year, as long as that gift goes directly into a 529 plan. Then it’ll be treated as a gift that’s spread over the next five years at $15,000 per year. You can give this type of monetary gift all at once, but note that it cuts into your exclusion each year for five years.
Another key exception for monetary gifts and the gift tax is when you’re donating money to a charity or non-profit. Not only will you not need to worry about gift tax exclusions when making charitable donations, but your donation may also be tax deductible.
Ultimately, giving a monetary gift is fairly simple and hands-off. Even still, it’s typically a good idea to stay below the annual exclusion at the end of each year. But even if you eclipse the limit, you won’t own additional taxes until you go over the lifetime gift tax exclusion, which is quite high.
Either way, it’s always worth thinking about the best way to give a monetary gift. In some cases, like college tuition and medical bills, you don’t have to worry about taxes at all if you make payments directly to the institution. In others, you may even get a tax credit, as is the case with charitable donations.
Tips for Managing Your Taxes
- When it comes to investing and managing your finances, taxes can be a pain to figure out. Finding a qualified financial advisor who can help doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Managing and filing your taxes on your own isn’t always easy. If you’re going at it yourself, you’ll want to prepare. SmartAsset has you covered with a number of free online tax resources. Check out our tax return calculator today.
Photo credit: ©iStock.com/urfinguss, ©iStock.com/designer491, ©iStock.com/fatido