Taxes 101: Gift Tax

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While taxes may not be top of mind right now, giving can be. Whether you’re looking for the perfect gift for a graduation, wedding, bridal or baby shower, consider the gift tax – an IRS write-off that allows you to give up to $14,000 to any number of people without incurring gift taxes. And so that the recipient does not have to pay any income tax on the gifts.

You might think, “It’s my money and I’ll do what I want.” It’s a good idea, but not so true. You needed to record the account when you earned it and likely paid the tax at the time, and you should know the rules for issuing it if that’s your intention. Why do you want to do this? The estate tax exclusion has increased over the years and is now $5,490,000. Giving while you’re alive can reduce or eliminate potential estate taxes. You know, a little something that says “I love you” and a big check too.

Let’s start with the simplest gift issue. You can give your spouse unlimited cash or anything of value without gift tax. If your spouse is not a citizen, the limit is $148,000.

You can gift someone up to $14,000 per year tax-free and with no documentation required. Your spouse has the same option, so between you it’s $28,000. If you have two kids and they’re married, you can see how that can add up pretty quickly.

There are a few exceptions to this limit. You can pay someone’s medical bills or higher education expenses without limit. To avoid breaking the rules that funds must be sent directly to pay taxes, you cannot send your child a check for $40,000, even if he writes a college check on the same day you just gifted him the limit. Gifts to qualified charities are also exempt from gift tax, regardless of amount.

There is also the option to transfer more than $14,000 per person using a 529 college savings account. Current tax law allows you to gift up to 5 years in advance, or a gift of $70,000. This strategy requires a properly completed Form 709 gift tax return, even though no tax is due.

It is also wise to use the 709 to record any large dollar transactions involving the household. For example, you sell a house to a child for $250,000. Years later, when you move out, the IRS, during an audit of your property tax return, may decide that the home was worth much more and assess the property taxes. By filing a 709 and declaring the value of the transaction, you start the 3-year clock to the IRS, once it passes, the transaction cannot be questioned.

Don’t worry about these tax rules. TurboTax will ask you simple questions and give you the tax deductions and credits you’re eligible for based on your answers.

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