Are you planning to give a special gift to a deserving graduate?
Are you curious about the tax consequences of that gift? The Internal Revenue Service provides regulations regarding the definition of a gift, how much one person may gift, the reporting requirements, and more.
What counts as a gift?
A gift is a voluntary conveyance to someone made without consideration, meaning the person receiving the gift does not give anything in exchange for the gift. The current (2021) annual exclusion for gifts is $15,000. This means that you, as the person giving the gift, can give $15,000 to each person of your choosing in a given year without triggering a reporting requirement (there are a few exceptions to this rule). Your spouse can also give $15,000 to each person of his or her choosing in a given year. Therefore, a married couple can gift $30,000 to each person each year without reporting it to the IRS. These exclusions can be a valuable estate planning tool as they allow a person to gift money out of his or her estate and to family members tax-free.
What should I know about taxes & gifting?
Taxes are always a hot topic when it comes to gifting. There are a few considerations to note. First, you cannot deduct the value of a gift you have given on your tax return unless that gift is to a charitable organization. Second, if you limit the gifting to under the $15,000 per person exclusion, you do not have any tax reporting requirements. However, if you exceed the exclusion amount, you will need to report that on a gift tax return. It is important to keep in mind that it is the gift giver, not the gift receiver, who is required to report and pay any gift tax.
Even if you are required to report the gift to the IRS, you may not necessarily have to pay tax on it. Whether or not you have to pay gift tax depends on the value of the gift. The current federal lifetime tax exemption for 2021 is $11.7 million (“mm”) per person. This lifetime exemption allows you to either gift throughout your lifetime, or leave to family and friends at your death, a total of $11.7 mm tax-free. For married couples, both spouses get the $11.7 mm exemption. This means that if you are married, you and your spouse can give away a total of $23.4 mm before paying the gift tax.
However, keep in mind that the above exemptions amounts are presently being hotly debated by Congress and President Biden’s administration are subject to a “sunset rule” on January 1, 2026 based on the provisions passed under the 2018 Tax Cuts and Jobs Act signed into law by President Donald Trump. The sunset rule could lower the exemption amounts to $5.49 mm, plus indexed inflation. Please look out for our upcoming blog that will walk through the options being discussed for potential 2022 changes and a review of the 2025 sunset provision.
What if my gift will be used for education?
If your gift is for educational purposes, there are special rules that allow you to make a lump-sum gift to 529 college savings plans and spread that gift over five years to avoid reducing your lifetime federal tax exemption.
Most importantly, if you are considering gifting a large sum of money to that special graduate, you should consider the tax implications and effect on your personal estate plan before you make that gift.