Paula Field, CPA, CFE
Is a Gift a Tax Deduction?
I get this question a lot, and the answer is, “It depends.” How great is that? Well, let me explain further but first let’s iron out a few things.
Gifts can be deductions for BUSINESSES, but there are limits. For instance, each gift given has a limit of $25 which means that even if you spend $85 for that gift basket you gave one of your clients, you can only deduct $25 for that gift.
Gifts are not deductions for INDIVIDUALS if given to a family member, a friend, or your co-worker; however, if you are giving to a charitable organization recognized by the IRS then you can take a deduction on your Schedule A if your Schedule A expenses exceed your Standard Deduction. The Standard Deduction is $27,700 for Married Filing Joint returns and $13,850 for those filing as Single. Expenses included on your Schedule A are Medical Expenses in excess of 7.5% of your Adjusted Gross Income, Taxes, Interest, Charitable Gifts, and Casualty and Theft Losses mainly.
So, if you aren’t giving to an organization recognized by the IRS for charitable purposes, then what is the big deal about a gift? Here we go…
What is a Financial Gift?
A financial gift is a transfer of money or property from one person to another without the expectation of compensation or repayment. It is a voluntary act of generosity that can provide financial support and assistance to family members, friends, or charities.
Aka money, stock, cars, houses, boats, etc.
Financial gifts can be given for a variety of reasons, such as to celebrate a special occasion, provide financial assistance, or support a cause.
Annual Gift Tax Exclusion
If you give a financial gift, there are tax rules that you need to follow! The most important one is called the Annual Gift Tax Exclusion. For 2023 the IRS lets you give up to $17,000 without any tax implications. That means that if you have 10 grandchildren you can give each of them $17,000 for a total of $170,000 every year without any tax consequences. Now, if you are married both you and your spouse can give each of your 10 grandchildren $34,000 for a total of $340,000 without any tax consequences.
The Annual Gift Tax Exclusion amount can change yearly so please make sure that you check this amount every year.
What About Medical and Education Gifts?
Medical and Education expenses do not reduce your Annual Gift Tax Exclusion if they are paid directly to the facility providing the care or education. Tuition qualifies for this treatment, but room and board does not. Payments to a school include nursery schools, private schools, and colleges. If you don’t make your payments directly to the facility, then you need to include them as part of your Annual Gift Tax Exclusion. But what if you didn’t pay them directly to the facility and they are more than the $17,000?
What is a Gift Tax Return?
A Gift Tax Return, Form 709, is the form you use to report to the IRS the gifts you made during the year that were in excess of $17,000 to one person, but that doesn’t mean you necessarily owe tax! The person giving the gift is responsible for filing the tax return. The person receiving the gift does not need to include the gift in their income. However, if you receive an appreciable asset and later sell it, you will need to report the income on your tax return.
How much is the Lifetime Exclusion and why is that Important?
The lifetime exclusion is $12,092,000 for 2023. That means that you can pass an estate of $12,092,000 or less to your heirs without having to pay an estate tax at your passing. In addition, by filing a gift tax return you can recognize annual gifts in excess of $17,000 to any one person as a reduction to your lifetime exclusion.
Let’s say you and your spouse gift one of your children $50,000 for a down payment on their first home. Since that amount is $16,000 more than the Annual Gift Exclusion, you must file a Form 709 Gift Tax Return and report the gift. The $34,000 will fall under the Annual Gift Exclusion and the remaining $16,000 will reduce your Lifetime Gift Tax Exclusion from $12,092,000 to $12,076,000, and no tax will be owed.
Currently, the increase in the Lifetime Gift Tax Exclusion is set to expire in 2025 and return to $5,000,000, which will be adjusted for inflation. Congress could change that and extend the date or change the law…but right now, this lifetime exclusion will expire in 2025. The IRS did recently say that if you take advantage of the current $12,092,000 and gift a substantial amount of your estate before 2025 then you will not be penalized if and when the Gift Tax Exclusion decreases to $5,000,000.
Can I give unlimited gifts to my spouse?
Yes, you can give unlimited gifts to your spouse without having to pay gift tax. This is known as the unlimited marital deduction.
Even better, the unused portion of your $12,092,000 Lifetime Exclusion is portable to your spouse, providing for a possible $24,184,000 Lifetime Exclusion for your surviving spouse by having your CPA file a Form 706 Estate Tax Return to elect portability for your Deceased Spousal Unused Exclusion (DSUE, a topic for another day). The important thing is to be working with a CPA that has experience and knows how to do this for you.
The IRS extended the deadline to file the portability election for DSUE to five years from the date of the death of your spouse. If you lost a spouse within the last five years and could benefit from their unused lifetime exclusion, please contact my office so we can help you with this.
Strategies for Giving Financial Gifts
There are a few strategies that can be used when giving financial gifts to maximize tax benefits. One strategy is to hold on to highly appreciated assets, such as stocks or real estate to be included in your estate. By saving your highly appreciated assets for your estate, your beneficiaries will receive a step up in basis meaning your cost basis will reset to the current Fair Market Value, which means a taxable gain would be avoided if the asset is sold soon after being received.
Another strategy is to make gifts to a trust, rather than directly to an individual. By making gifts to a trust, you can maintain some control over the assets and ensure that they are used for a specific purpose.
Of course, if you can and you want to give, then give, give, give!