Taxpayers who give money or property to others may wonder about the federal gift tax and if it applies. Most gifts are not subject to the gift tax.
Here are seven tax tips about the gift tax and giving:
1. Nontaxable Gifts. The general rule is that any gift is potentially taxable. However, there are exceptions to this rule. The following are nontaxable gifts:
- Gifts that do not exceed the annual exclusion amount for the calendar year,
- Tuition or medical expenses a taxpayer pays directly to a medical or educational institution for another person,
- A taxpayer’s gifts to their spouse,
- Gifts to a political organization for its use, and
- Gifts to charities.
2. Annual Exclusion. For 2016, the annual exclusion amount is $14,000. Most gifts are not subject to the gift tax. For example, there is usually no tax if the taxpayer makes a gift to their spouse or to a charity. If a taxpayer makes a gift to another person, the gift tax usually does not apply until the value of the gift exceeds the annual exclusion amount for the year.
3. No Tax on Recipient. Generally, the person who receives the gift will not have to pay tax on it.
4. Gifts Not Deductible. Making a gift does not ordinarily affect the taxpayer’s situation. A taxpayer cannot deduct the value of gifts they make (other than deductible charitable contributions as subject to the tax code).
5. Forgiven Debt and Certain Loans. Taxpayers who forgive debt or make a loan interest-free or below the applicable market interest rate may be subject to the gift tax.
6. Gift-Splitting. A taxpayer and their spouse can give up to $28,000 to a third party without making that gift taxable. Taxpayers need to consider one-half of the gift as from them and one-half given by their spouse.
7. Filing Requirement. Taxpayers need to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, if any of the following apply:
- The taxpayer gave gifts to at least one person (other than their spouse) that amounts to more than the annual exclusion for the year.
- The taxpayer and their spouse are splitting a gift. This is true even if half of the split gift is less than the annual exclusion.
- If the taxpayer gave a person (other than their spouse) a gift of a future interest that the recipient can’t actually possess, enjoy, or from which that person will receive income later.
- A taxpayer gifting their spouse an interest in property that will terminate due to a future event.
Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.
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