For those of you who don’t know me that well, let me share something about myself. I love to give gifts! It doesn’t matter what the occasion is. I spend a lot of time planning what to get people. These gifts can be items, experiences, personal services, and of course, there are also times when it is best to just give cold hard cash. The most important thing to me is making sure that the gift is the perfect thing for the person receiving it. The last thing I want to think about during this process is taxes!
This blog post will cover the common tax questions people have when giving/receiving gifts. My guess is that you don’t think about taxes for 99% of the gifts you give and receive. However, at some point in your life, there may be an instance where you will want to make sure that generosity doesn’t result in a tax bill. At that point you can think to yourself, “Boy, I am glad I read Mike’s blog post six years ago!”
General Rule – Most gifts transfer tax free. The receiver can do whatever they want with the gift without having tax issues. The IRS doesn’t care when you give your dad another pair of socks for Father’s Day.
Appreciated Assets – The first twist to our tax-free rule is appreciated assets (i.e. stocks, homes, artwork). These items still transfer tax free, but the gift receiver will have tax consequences if they sell the asset.
Example: I have $2,000 in shares of Apple stock that I want to gift to you. I paid $500 for it a few years ago. Once you take ownership, you assume the $500 cost basis in the stock. That means that if you sell it the next day for $2,000, you would have to report a $1,500 gain on the sale. The details can get confusing, but it is important to know that selling stocks that you received as a gift will not be a tax-free transaction.
Note: This law is different if you inherit appreciated assets from someone who has passed away.
Annual Exclusion – The IRS sets a limit for the maximum value you can give a person each year without any tax consequences. The amount in 2018 is $15,000. This means that every person can give any other person up to $15,000 worth of gifts during the year. This amount may be split between husband and wife. If you are married, you could give up to $30,000 per year. However, if you split gifts, you will need to file the gift tax return even though there is no tax that needs to be paid.
Lifetime Exclusion – What happens if you go over the $15,000 annual exclusion limit? Don’t worry just yet! Everyone has a lifetime exclusion amount that they can give before causing tax issues. The current amount is $11.18 Million. For most people, this amount seems like a non-issue. However, the lifetime exclusion is what factors into gift tax issues upon death as well. This amount has changed many times and will almost certainly change again before you die. Just know that if you give gifts over the annual exclusion, you will have to file a gift tax form to reduce the lifetime exclusion.
If you manage to use up your entire lifetime exclusion, then you would have to pay gift tax on the amount given. It’s important to remember that the person giving the gift is responsible for paying the tax. As you would imagine, most of the time this isn’t an issue until someone dies and the estate is being settled and gift taxes need to be paid during that process.
Hopefully this helps you understand some more about the laws relating to gift taxes. You may never have to worry about it, but it is important to dispel any rumors that you may hear about gift taxes. There may also come a time when you are giving gifts that would make you consider these factors. In the meantime, keep giving gifts! There is no greater feeling that finding the perfect way to make someone else feel loved.
Mike Zeiter, CPA/PFS