If I give money, do I have to pay taxes to the IRS?

When we talk about taxes, there are many things to worry about and many details to take into account. There are still people who wonder: If I give money, do I have to pay taxes to the IRS?

What is the gift tax?

The gift tax is a federal tax that applies to the transfer of money or property to another person without receiving anything in return (or less than the full value).

Most people are not affected by gift tax since the IRS doesn’t care what you give. unless the gift exceeds some large amounts. In many cases, only a few additional papers need to be filled out and submitted.

Keep reading: 9 US states that do not charge income tax

If I give money, do I have to pay taxes to the IRS?

If I gift money, do I have to pay taxes to the IRS?

There are two factors that tend to keep IRS away from most people when it comes to gifts: the $15,000 annual exclusion in 2019 and 2020, and the $11.4 million lifetime exclusion in 2019.

In 2020, the lifetime exclusion was raised to $11.58 million. If you stay below these values, you can be generous without taking risks.. If you go above and beyond, you’ll need to fill out a gift tax form when you file your returns, but you’ll still avoid having to pay gift tax.

IMPORTANT: Change of tax rules due to coronavirus

As part of the measures of the United States government against the coronavirus, the deadline for the payment of taxes was changed to July 15, 2020.

How the annual gift tax exclusion works

In 2019 and 2020, you’re allowed to give up to $15,000 to someone within a year and you generally don’t have to deal with the IRS for it. Please note the following information:

  • If you give more than $15,000 in cash or assets (eg stocks, land, a new car) in one year to anyone, you’ll need to file a gift tax return. That doesn’t mean you have to pay a gift tax. It just means that you have to file IRS Form 709 to disclose the donation.
  • Annual exclusion is per recipient; It is not the sum total of all your gifts. That means, for example, that you can give $15,000 to your cousin, another $15,000 to a friend, another $15,000 to your neighbor, and so on. All in the same year, without having to file a gift tax return.
  • The annual exclusion is also per person, which means that if you’re married, you and your spouse can give a total of $30,000 a year to whoever you want without having to file a gift tax return.
  • Donations between spouses are unlimited and are generally not included on the gift tax return. Gifts to non-profit organizations are charitable donations, not gifts.
  • The person receiving the gift generally does not need to report it.

Keep reading: Refundable AMT credit for stock option taxes

How the lifetime gift tax exclusion works

  • In addition to the $15,000 annual exclusion, there is a lifetime exclusion of $11.4 million (in 2020, it rises to $11.58 million). And since it’s per person, married couples can exclude double in gifts for life. That comes in handy when giving away more than $15,000.
  • “Think in buckets or cups,” says Christopher Picciurro, a certified public accountant and co-founder of the Integrated Financial Group accounting and advisory firm in Michigan. Anything in excess of 15,000 “spills” into the lifetime exclusion bucket.
  • For example, if you give your brother $50,000 this year, you will exhaust your $15,000 annual exclusion. The bad news is that you’ll have to file a gift tax return, but the good news is that you probably won’t pay a gift tax. Why? Because the extra $35,000 ($50,000 – $15,000) simply counts toward the $11.4 million lifetime exclusion. Next year, if you give your brother another $50,000, the same thing happens: you use your $15,000 annual exclusion and reduce another $35,000 from your lifetime exclusion.
  • “What the gift tax return does is keep track of that lifetime exemption”says Julie Malekhedayat, a CPA and director of the accounting and consulting firm Abbott, Stringham and Lynch in San Jose, California. “So, if you don’t give anything away during your lifetime, then you have the lifetime exemption to use against your estate when you die.”

What is the gift tax rate?

If your generosity manages to exhaust your exclusions and exemptions, you may have to pay gift tax. Rates range from 18% to 40%, with the donor generally paying the tax. There are, of course, exceptions and special rules for calculating the tax, so check the instructions of the form 709 from the IRS so you have all the details.

Ruin the grandkids with college money

  • Picciurro explains it like this. «Let’s say that the grandmother and grandfather say: ‘We don’t like your husband’s behavior and we don’t like how you have approached your life, but we love our grandchildren very much. So we’re going to give them $60,000 and put them in a 529 plan to put them through college. Well, Grandma and Grandpa just activated the gift tax exclusion because it’s more than [15.000 dólares]».
  • A special rule allows donors spread the gifts all at once over five years’ tax returns to preserve your lifetime gift exclusion.

The spring of the holidays, cars or other things

  • Whether you’re paying $40,000 for your son’s wedding, or just paying for the crazy cheap honeymoon, be prepared to do the paperwork. “Those kinds of things are considered gifts at the tax level and people usually don’t even realize it,” warns Malekhedayat.
  • But if you’re paying tuition or medical bills, paying the school or hospital directly can help you avoid the gift tax filing requirement (see the instructions in the form 709 IRS for more details).

Keep reading: What does Alternative Minimum Tax mean?

overdue loans

Lending money to friends and family may not be the best of ideas, due to interpretation by the IRS. Interest-free loans are considered gifts, Malekhedayat says. “And if you give them a loan and then decide they don’t need to repay the loan, that’s also gift giving,” he warns.

If you are included in a bank account that does not belong to your spouse

“Let’s say you live with Grandma, so for convenience, they include you in Grandma’s bank account. Guess what just happened? Picciurro says. “If you are listed as a co-owner on a bank account with someone and you have the right to withdraw the money at any time, essentially Grandma is giving you a gift.”

Now that you have clarified your doubt: If I give money, do I have to pay taxes to the IRS? Remember that there are minute details that are not usually contemplated by most people. So from now on, you need to better analyze the types of transactions you make.

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