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Granting people gifts makes you and them happy. If you can tailor your generosity so not to pay tax on your largesse, you will be even happier. It pays to know the rules about the taxes that your magnanimity may trigger.
Without incurring any taxes, you can give one person up to $15,000 annually. What’s more, you can give numerous people a gift of up to that sum, and they need not even be related to you—your daughter, your childhood pal, your barber, etc. You’re the one who pays the tax, by the way, not the recipient.
So if you give your beloved next-door neighbor $20,000, you only owe taxes on the $5,000 above the $15,000 limit. And a gift need not be cash. It could be stock or a house or a boat. Hint: Try to keep it at or below $15,000.
Another boon is that the $15,000 ceiling is per person, not per couple. You can give $15,000 and your spouse could give the same person the identical amount, doubling the gift. That lets you stay under the yearly limit. Plus, should you make a gift to a charity or a spouse, you don’t owe a penny in tax.
Aside from the $15,000 cap, the more wealthy gift-givers need to beware of a lifetime maximum of $11.4 million (that’s for 2019, and it may rise next year). Called the lifetime exclusion, that restriction governs all the giving you do during your time on this earth, to everyone.
For any amount over that, you or more likely your estate pays estate tax. The top rate for the overage is 40%. Unless you blow the money in one place—like that sprawling ranch in Texas your brother always coveted—odds are you won’t bust through the upper limit.
The sweet part is that you don’t have to pony up to the IRS with each gift that blasts through the $15,000 level. Let’s say you give your daughter $50,000 in 2019. That puts your gift $35,000 above the ceiling, an amount that is taxable. Rather than write a check to the government now, you count it against the $11.4 million lifetime exclusion. Subtract that $35,000 from the lifetime exclusion, you have $11.365 million remaining.
A word of warning: Some big-ticket items may not seem to be reportable gifts, but really are, and you need to file a form to the IRS on them. Perhaps you donated $80,000 toward your son’s down payment on a house, or made a $20,000 no-interest loan to a friend or spent $75,000 on your daughter’s wedding. Only gifts to defray medical or educational costs are tax-free.
All this boils down to a simple concept: When giving, give yourself a break.