Giving Your Kids Some Money This Year? The 5 Critical Rules You Need to Know About Gift Taxes Before You Do It.

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Clients ask me all the time: if I give my kids a substantial gift, say $10,000, who has to pay the tax? Me or my child?

Well, the answer usually is good news.  Generally, no one has to pay any tax on this kind of gift.  But, here are 5 critical rules that you need to know about gift taxes before you make that gift.

Rule Number 1 – The Person Making the Gift is Responsible for Any Taxes

Let’s begin with how the IRS views a “gift.”  Quite frankly, it’s pretty straightforward – a gift is any transfer to an individual where full consideration (measured in money or money’s worth) is not received in return. So, if I give my daughter $10,000 and she gives me nothing in return, the IRS considers that a gift. (By the way Steph, don’t get too excited…your Old Man isn’t giving you $10,000 this year!).

Now, here’s the place that most people get tripped up: they wonder who’s responsible for any tax on that generous gift that they just made.  So, the first rule of thumb is that any gift tax is the responsibility of the person who gives the gift. It’s not the responsibility of the person receiving the gift.

Rule Number 2 – Not Every Gift Requires a Gift Tax Payment

The good news is that there is an annual gift tax exclusion that the government has set. This means that the giver of the gift doesn’t have to pay tax on gifts that are less than $16,000 per person per year.  In my example where I’ve given my daughter $10,000, there’s no gift tax about which I need to worry because it’s under the current gift tax exclusion amount of $16,000.

By the way: that annual gift tax exclusion just went up this January 1, 2022.  Last year it was $15,000.

Rule Number 3 – Married People Get to “Double it Up”

What’s neat about this annual exclusion for married couples is that they can actually give “split gifts” of up to twice the amount of the gift tax exclusion to individuals each year. For example, a married couple could give a child or grandchild up to $32,000 in 2022 and not exceed this gift tax exclusion because each spouse enjoys that $16,000 gift tax exclusion.

Rule Number 4 – Some Gifts Do Require an IRS Filing

There are times when we want to be more generous and give away more than the annual exclusion. So what happens when we exceed a gift of $16,000 for the year?

Well, like anything that involves taxes, you’re going to have to file a form with the IRS letting it know you’ve made a gift greater than $16,000.  The filing is a Form 709 and each person who makes a gift (or gifts) greater than $16,000 to a person in a single tax year, must file the Form 709 by April 15th of the following tax year.

Important Note: In 2021, the exclusion amount was $15,000. So, if you gave away more than that amount to a single person last year, you’re going to have to file that Form 709 by April 15, 2022.

Rule Number 5 – Practically Speaking Most People Don’t Owe Gift Tax to the IRS

If you have to file Form 709 because you’ve given away more than $16,000 in a given year does that mean you’re going to pay more in taxes when you file your returns?

Practically speaking the answer for most of us is “no – not likely.”

Just because you’ve reported a taxable gift on Form 709 doesn’t necessarily mean you’ll have to pay a gift tax while you’re living. You see, the government has actually set up a lifetime amount of giving that you can make before you’re stuck paying gift tax. This lifetime credit amount is currently $12.06 million dollars per person! So, unless you’ve been giving away super amounts of wealth, you won’t exceed this lifetime credit and have to pay gift tax.

This lifetime gift tax was created in order to stop people from dodging inheritance taxes by giving away all of their money before they die. If it wasn’t in place, the rich could simply give away the bulk of their money and property while they’re living to spare their heirs from these inheritance taxes.

“Wrapping Up” Our Talk About Gifts

Although I could keep talking about gift tax rules, I have limited space and need to “wrap it up” here (sorry for the pun).  Remember that these gift tax and exclusion limits do apply whether you’re giving to family members or you’re making a gift to a complete stranger.  They don’t apply, though, when you make gifts to your spouse. Uncle Sam at least allows married people to make unlimited gifts to each other for life without any gift tax ramifications.

Making gifts can definitely be part of your estate planning, but some of the IRS rules can be confusing.  If you’re feeling generous and want to give a gift, be sure to turn to a legal or financial professional who is well versed in gifting rules for answers. Or, if you’d like our help and guidance, just book a Complimentary Family Legal Planning session.