Giving gifts is a fun thing to do and can benefit both the giver and the receiver. However, you should be aware of some gift tax rules before you start toying with the idea. Fortunately, you can give a lot of gifts before you have to worry about paying taxes on them. The key is to follow government guidelines, and keep track of your gifts as you go along.
A “gift” is anything you give to someone without expecting a return. This can be a cash gift, a tangible item, or even something as simple as a gift card. Gifts that are less than $15,000 will not incur a gift tax. If you plan on giving more than this, you may have to register the gift, which is similar to registering your car. You will also have to file a Gift Tax Return if the amount exceeds the maximum allowed.
For example, you can give a $20 bill as a birthday present to your wife. Although the law says it is not a tax-free gift, you are not required to report the gift. On the other hand, if you give a washing machine as a present, it may be taxable.
There are several different types of gift tax rules to look out for. One of the most common is the annual gift tax exclusion. As of 2023, you can give up to $34,000 per recipient, and $175,000 to a non-US citizen spouse. Combined with your lifetime exemption, you can give up to $272,000 to your kids, grandkids, and even your friends.
The annual gift tax exclusion is the most common gift tax rule used today. It is the one that most people use to get around paying the big bucks in taxes. Of course, the most expensive gift you can give isn’t necessarily the best gift you can give, and the smallest gift you can give isn’t necessarily a bad idea. But if you can’t afford to pay a fortune in taxes, it’s a good idea to think long and hard about how much you can give, and whether or not the recipient is likely to appreciate it.
Another rule is that you should never make an extravagant gift that you cannot afford to repay. If you give your nephew or niece a brand new vehicle, you might be putting yourself at risk for a tax debt. Also, if you give your aunt a cash gift to have surgery, you may be breaking the law. That is, unless you’re really in a hurry and are willing to pay the price.
If you are planning on giving more than $15,000 or $175,000 in gifts this year, you should think about filing a Gift Tax Return. Having a record of your gifts will save you time and money in the future. Using the government’s most generous gift tax rules can help you avoid a headache down the road.
The best part about the gift tax rules is that they are easy to understand. Most gifts fall well under the average yearly threshold.