If you give someone money or property during your lifetime, you may be subject to federal gift tax. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or a qualified charity. If you make a gift to someone else, the gift tax does not apply until the value of the gifts given to that person is more than the annual exclusion for the year. The annual exclusion for tax year 2018 and 2019 is $15,000 ($14,000 for tax years 2014 – 2017). A separate annual exclusion applies to each person to whom you make a gift. Regardless of the identity of the recipient or the purpose of the gift (contributions to a 529 plan, to help pay for a car or to take a Nicaragua cruise), any gift of present interest which falls under the annual exclusion limit is exempt from tax.
A gift is considered a present interest if the donee has unrestricted rights to the immediate use, possession, and enjoyment of the property or income from the property.
Generally, you do not need to file a gift tax return (Form 709, Gift Tax Return) unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year. The donor is generally responsible for paying the gift tax. Generally, the person who receives your gift (donee) will not have to pay any gift tax because of it. In addition, that person will not have to pay any income tax on the value of the gift received. Making a gift does not ordinarily affect your federal income tax. Gifts to individuals are not deductible on the donor’s income tax returns (other than gifts that are deductible charitable contributions).
There are some exceptions to the tax rules on gifts. Generally, the following gifts are not taxable gifts:
- Gifts that are not more than the annual exclusion for the calendar year ($15,000 for 2019),
- Tuition or medical expenses you pay for someone (the educational and medical exclusions),
- Gifts to your spouse,
- Gifts to a political organization for its use, and
- Gifts to qualified charities.
If you are married, both you and your spouse can separately give up to $15,000 to the same person in the same year without making a taxable gift. If one of you gives more than $15,000 to a person, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Together, you can give up to $30,000 to a person without making a taxable gift. If you decide to split a gift, you must file a gift tax return showing there was an agreement to split the gift.
Generally, all gifts are included in the $15,000 maximum, including birthday, wedding, graduation, etc. The making of a gift does not create a deduction for the donor (unless it is a charitable donation to a qualified charity) nor income to the recipient.
Report a gift subject to gift tax on Form 709, Gift Tax Return. Form 709 is due April 15 following the year of the transfer.
It is important to keep in mind that these numbers can change every year so it is important to look at the current law before making any large transfers.