What is the IRS rule for gifting money to family members?

Gifting with Love, Without the Tax Bite: Understanding the IRS Rules on Family Gifts

Family is everything. And sometimes, that means wanting to help out loved ones with a financial gift. While the gesture itself is heartwarming, there’s a practical side to consider: taxes. Thankfully, the IRS recognizes the importance of family support and offers an annual exemption that allows you to gift money to loved ones without incurring any tax obligations.

The Annual Gift Tax Exclusion:

The IRS allows you to gift a certain amount of money to each individual recipient each year without it being subject to gift tax. For 2023, this annual exclusion is $17,000 per person.

This means you can gift up to $17,000 to your spouse, child, parent, sibling, grandchild, or any other individual without triggering any tax liability for either you or the recipient.

Gifting More Than the Exclusion:

If you want to give more than the annual exclusion, don’t worry, you aren’t necessarily facing a tax penalty. However, it’s crucial to understand the “lifetime gift tax exemption.” This currently stands at $12.92 million per person (as of 2023).

This lifetime exemption allows you to gift large amounts of money throughout your lifetime without incurring any gift tax, as long as you remain under the total limit. For instance, if you gift $100,000 to your child this year, that amount will be deducted from your lifetime exemption. However, you can still utilize the annual exclusion to gift an additional $17,000 to them next year.

The Gift Tax Filing Requirements:

While the gift tax exclusion makes things simpler, it doesn’t mean you can simply hand over cash and forget about it. You are still required to report gifts exceeding the annual exclusion. This is done through Form 709, the US Gift (and Generation-Skipping Transfer) Tax Return. The form needs to be filed by April 15th of the following year.

Keep in Mind:

• Spouses can combine their annual gift tax exclusions: If you’re married, you can jointly gift up to $34,000 to a single recipient without triggering any tax liability.
• Gifts to trusts: Gifts made to trusts are considered to be made to the trust’s beneficiaries.
• Gift tax reporting: It’s best to err on the side of caution and consult a tax professional if you have any doubts or are considering a large gift.

Conclusion:

The IRS gift tax rules aim to strike a balance between supporting family and ensuring fair taxation. By understanding the annual exclusion and lifetime exemption, you can help your loved ones financially without worrying about tax implications. Remember, it’s always advisable to consult a qualified tax advisor for personalized guidance on your specific gifting needs.