If you’re helping to support your parents or another adult family member with money or gifts, you may wonder if you’re eligible for a tax deduction. The answer is no. The IRS does not allow a deduction for gifts to individuals, though you may get a deduction if your gift goes to a charity or other qualifying organization. Additionally, if the value or your gift exceeds an IRS-defined limit, you may have to pay an IRS gift tax. Gift tax rates range up to 40 percent, but most people don’t give away a substantial enough amount to be subject to a gift tax.
IRS Gift Definition
In the eyes of the IRS, a gift is the transfer of money or property from one individual to another, without compensation for the full value of the property. Cash, stocks and tangible items given to a friend or relative are considered to be gifts, as is real estate that’s transferred from one person to another without payment. When you sell an item or piece of real estate to someone for much less than its fair market value, the difference between the selling price and its true value is also seen as a gift.
In addition to gifts of money and property, the IRS includes the use of property (such as living in a house rent-free) and income from the use of property in its definition of taxable gifts. The uncollected interested on an interest-free loan to a friend or relative is also defined as a gift by the IRS. If you give someone the gift of a future interest from which they’ll later receive income, the IRS considers it to be a gift.
Tax Deductible Gifts to Family Members
Gifts to children and family members, including property left through an estate, are not tax deductible for either the giver or receiver. In general, these gifts shouldn’t affect the amount of tax owed by either. However, the IRS defines an exclusion limit for gifts. If the value of a gift exceeds this limit, the giver needs to file a gift tax return and may be subject to a gift tax. The person who received the gift doesn’t have to pay income tax on it, even if the value exceeds the exclusion gift tax limit. The annual exclusion limit is adjusted every few years by the IRS to account for inflation and is set to $15,000 for the 2018 tax year.
Are Charitable Gifts Subject to Tax?
Gifts made to charities and some other non-profits are not subject to a gift tax and may allow the giver to claim a tax deduction. In the Internal Revenue Code, section 501(c)(3) is very specific about the types of organizations that qualify for charitable contributions. An organization must be a religious, educational, scientific, literary or humanitarian group. A charity is always a group and never an individual person.
In order to claim a charitable deduction, you must file Form 1040 and itemize deductions on Schedule A (Form 1040). Note that Form 1040 has been modified for the 2018 tax year to reflect tax reform. When claiming a deduction for a charitable contribution, you are also required to show proof that the organization received the gift in the form of a receipt, your canceled check or letter from the organization.
Other Exceptions to Taxable Gifts
In addition to charitable donations, there are a few other gifts that the IRS recognizes as exceptions to its gift tax law. Tuition paid directly to a school for someone else is not considered to be a taxable gift by the IRS, but that is not true of the cost of books or room and board. You can pay medical expenses directly to a healthcare institution on someone else’s behalf and not be subject to a gift tax. Also, you don’t have to pay a gift tax on gifts to your spouse if he or she is a U.S. citizen. If your spouse is not a citizen, you can give up to $152,000 in gifts in 2018 without having to report it as a taxable.
How the IRS Gift Tax Works
The IRS gift tax applies to the cumulative value a taxpayer’s entire lifetime of gifts given to others. The lifetime exclusion was raised in 2018 from $5.49 million for single taxpayers to $5.6 million in cash or property, with a married couple having a combined $11.2 million exclusion. Although you may be required to file a gift tax return if you exceed the annual gift exclusion, you won’t be required to actually pay a gift tax until you’ve exceeded the lifetime exclusion.
For example, suppose you gave your two adult children $25,000 in the same year. If you file as a single taxpayer, the IRS considers each of these gifts to be taxable because they are greater than the $15,000 gift exclusion. You would file a gift return and report these gifts. Each gift would reduce your lifetime exemption by $10,000, which is the amount by which each exceeds the $15,000 exclusion. Alternatively, you wouldn’t need to file a gift tax return if you instead gave them each $15,000 one year and $10,000 the next.
Filing a Gift Tax Return
Taxpayers who have given gifts that exceed the annual exclusion limit are required to file IRS Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return. Along with the return, copies of relevant documents such as property appraisals must be provided to the IRS. Filing a gift tax return does not mean that you will automatically have to pay a gift tax. In most cases, the gift amount reported in excess of the annual exclusion will simply be deducted from the taxpayer’s lifetime gift exclusion.
Form 709 must be filed by April 15 the year after the gift was given. Taxpayers who receive an extension for their income tax return automatically receive an extension for filing Form 709. Unlike an income tax return, which a married couple may file jointly, each spouse is expected to file their own gift tax return. However, if both spouses agree they may split the value of their gifts. With gift splitting, all gifts made by either spouse will be considered to be made one-half by each spouse.
2018 Tax Law
The annual exclusion for taxable gifts for the 2018 tax year is $15,000 for single taxpayers and $30,000 for married couples filing jointly. Changes to tax law put into effect by the Tax Cuts and Jobs Act raised the standard deduction to $12,000 for single filers and $24,000 for couples filing jointly. This could affect the number of taxpayers who claim charitable deductions since they must have deductions that exceed the standard deduction in order to itemize and claim charitable donations on their 2018 tax returns. The lifetime gift tax exemption in 2018 increased to $5.6 million per person.
2017 Tax Law
The IRS gift tax exclusion for 2017 is $14,000 per person. If you are filing a tax return for 2017 and gave less than that amount to one or more people, none of the gifts require reporting to the IRS. Married couples filing joint returns can give up to $28,000 per person without reporting the gifts. The lifetime gift tax exemption in 2017 was $5.49 million.