The joy of receiving a gift of money is often met or exceeded by the joy that the giver receives. What could potentially squash this reciprocal joy, however, would be a hefty gift tax for the giver and/or the receiver. But if you’re the benefactor of financial largesse to friends or family, you may be happily surprised to discover the steep tax-free limits that the IRS places on monetary gifts. This may even prompt you to give a pre-inheritance financial gift to your children or financially help other loved ones during your lifetime. And if you’re the happy recipient of a gift of money, you can really celebrate. Because the IRS does not consider gifts of money as income for taxpayers, you won’t owe any income tax on your gift.
Taxpayers who give monetary gifts do not have to pay a gift tax unless the amount of money they give crosses certain IRS thresholds. In 2018, tax-free gifts of money include a staggering $5.6 million lifetime cap for an individual giver and an unlimited tax-free amount for the gift recipient.
IRS Gift Definition
Viewed through the eyes of the IRS, money is actually classified the same as other gifts such as jewelry, household items, real estate or stock. The IRS inclusive term for all gifts is a “transfer.” Anything of value that you “transfer” to someone else – in a transaction that is not compensated by payment or exchange for something else as "full consideration" – is considered a gift. Giving something without receiving in return truly defines the purest form of a gift. But the IRS is clear that even if you give someone money in exchange for services instead of goods ("money's worth"), that negates the definition of a gift. You may not be receiving something tangible in return, but you’re still receiving something of value in an intangible service.
Are Gifts of Money Taxable?
In a word, yes. But you’ll have to dole out a huge sum of money before you’ll owe any taxes on your gifts. In fact, this sum is typically far out of the reach of most taxpayers. The IRS establishes tax-free gift limits, which are called exclusions because the gifts are excluded from your tax liability. This simply means that if you stay within these limits, you won’t have to pay taxes on your gifts. The IRS further separates these exclusions into three categories: an annual exclusion, the lifetime exclusion and unlimited exclusions.
Annual Tax-Free Gift Limits
Beginning in 2018, you may give an unlimited number of people a tax-free gift of money during the tax year up to $15,000. You can give the money in one lump sum, or you can give multiple cash gifts during the year. As long as the total amount doesn’t exceed $15,000, you will not owe any tax on the single cash gift (or multiple cash gifts), and you will not even have to report the amount on your income tax return. Because this annual exclusion applies to each taxpayer, you and your spouse can each give $15,000 (for a total of $30,000) to your child. And if you have more than one child, you can give that amount to each child without incurring a tax penalty. You can even give $15,000 to someone on Dec. 31 and give another $15,000 to the same person one day later – on Jan. 1 – because each of these dates represents a different tax year.
Lifetime Tax-Free Gift Limit
Over your lifetime, you can give a hefty $5.6 million to any number of people – without paying a gift tax on the money. And if you’re married, this amount doubles to $11.2 million ($5.6 million per spouse). But there’s some pretty sweet icing on this tax-free cake. This lifetime exclusion is only made up of any amounts that are over the annual tax-free gift limits you’re allowed by the IRS. For example, if you gave your child $20,000 during the 2018 tax year, $15,000 of that sum meets your annual gift limit. You don’t have to pay tax on the $15,000, and you don’t have to report it on your tax return. Only the $5,000 overage is applied to your lifetime gift limit. But you still don’t have to pay taxes on the $5,000 unless all your overages cross the lifetime exclusion threshold of $5.6 million.
Unlimited Tax-Free Gift Exclusions
Although you may classify payment of tuition and medical expenses on behalf of someone else as gifts, the IRS does not require you to consider these costs when you’re tabulating your annual and lifetime gift exclusions. These expenses are unlimited tax-free exceptions to the gift exclusion rule.
- Educational exclusion. IRS Publication 709 outlines the requirements for qualifying educational exclusions. Only tuition is allowed as an exclusion, not other educational costs such as books, supplies and room and board. The school may be a domestic or foreign educational institution, as long as it qualifies. Examples of qualifications include a school that has a regular faculty, an enrolled body of students and a curriculum of study. You’ll have to pay tuition directly to the school (not to the student). If you pay costs other than tuition, you can include those amounts in your annual gift exclusion.
- Medical exclusion. If you make payments directly to a healthcare worker or medical facility on behalf of someone else, the gift tax doesn’t apply to these costs. The IRS lists the requirements for qualifying medical care and qualifying providers in Publication 709, Section 213(d). Some eligible medical costs include the diagnosis, treatment and prevention of diseases or illnesses. If an insurance provider reimburses you for any medical expenses, you can’t include the reimbursed costs under your medical exclusion.
Gifting Money to Your Spouse
Another notable exception to the gift tax rule is the money you give to your spouse. If your spouse is a
Gifting Money to Children
Although your children are certainly set apart from other people in your estimation, they are on equal footing with everyone else when it comes to tax-free gifts of money. The same exclusion amounts apply to your children as to other unrelated persons. Unlike other deductions and tax credits that require your child to be an eligible dependent or a qualifying child before you can take a tax break, you won’t have to figure out these eligibility requirements for simply giving them money. The gift tax exclusion rules apply to everyone equally.
Recipient's Gift Tax Liability
Regardless of the size of your monetary gift, you will not pass a tax liability onto the recipients of your gift. The responsibility for paying gift taxes rests on the shoulders of the person who gives the gift instead of the person who receives it. In certain cases, however, a recipient may agree to pay the gift tax. But you’ll have to consult a tax professional to establish a special arrangement for this. And keep in mind that nobody has to pay a gift tax unless the allowable exclusions exceed IRS guidelines.
Report Your Monetary Gifts
If you give someone more than $15,000 per tax year, you’ll only report the overage, not the entire $15,000. For example, if you give your friend $20,000, the first $15,000 is exempt from gift tax under the annual exclusion. Report the overage – $5,000 – on IRS Tax Form 709 (United States Gift and Generation-Skipping Transfer Tax Return). You still won’t owe any tax on the $5,000; it’s just a reportable amount that goes toward your lifetime limit of $5.6 million. You'll only owe gift taxes if you exceed this lifetime limit. If you're married, each spouse must file a separate gift tax return (Form 709). You won't be able to file a joint gift tax return and combine your gifts. And even if you make multiple cash gifts throughout the year, you'll only file one Form 709 to report any annual-exclusion overages.
Include Form 709 with your annual tax return and observe the same filing deadline, which is April 15 (unless that day falls on a weekend or legal holiday, in which case the deadline is the next business day). If you request an extension to file your regular tax return, the same extension will be granted for your gift tax return. Submit IRS Form 4868 "Application for Automatic Extension of Time to File U.S. Individual Income Tax Return" or Form 2350 "Application for Extension of Time to File U.S. Income Tax Return." But if you only need an extension for your gift tax return and not your regular tax return, file Form 8892 "Application for Automatic Extension of Time to File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax." By filing this form, you'll receive a six-month extension during which you can file your gift tax return apart from your regular tax return.
Follow Present Interest Guidelines
Any money that you give to others must be considered as having "present interest" before the gift is tax-exempt. What this means is that your gift recipient must have immediate access to the money. You cannot place conditions for a future date, which is known as "future interest," on which the money becomes accessible. The money you give must be free and clear with no limiting factors for you to claim the tax-exempt benefit.
Observe Joint Tenancy Rules
If you have a joint bank account with someone, the deposits you make into the account are not necessarily considered gifts simply because someone else has access to the funds. It's not until the other person withdraws the funds, which you've deposited, that they become a gift. The money must be to benefit the other person, and the other person must not have any obligation to repay you.
If you purchase a U.S. savings bond that is payable to you or another person, the value of the savings bond is not a gift unless the other person cashes the savings bond. It's only considered a gift from you if the other person has no obligation to repay you.
If you buy property with your own money but the title also includes the name of another person as a joint tenant, the property is not a gift as long as you're both on the title. If either of you gives up right to the title by severing your interest in the property, the other person becomes a recipient of a gift from you in the amount of 50 percent of the value of the property.
- Forbes: IRS Announces 2018 Estate and Gift Tax Limits - $11.2 Million
- IRS: Frequently Asked Questions on Gift Taxes
- IRS: Publication 709
- BlueCross BlueShield of Tennessee: IRS Code Section 213(d) FSA Eligible Medical Expenses
- Global Atlantic Financial Group: Non-Citizen Resident Estate/Gift Tax Quick Reference Guide 2018
- IRS: About Form 709 - United States Gift (And Generation-Skipping Transfer) Tax Return
- IRS: About Form 4868 - Application for Automatic Extension of Time to File U.S. Individual Income Tax Return
- IRS: About Form 2350 - Application for Extension of Time to File U.S. Income Tax Return
- IRS: About Form 8892 - Application for Automatic Extension of Time to File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax