Understanding Gift Tax

Gift box of moneyThe tax laws on gifts can be pretty confusing.

It’s not unusual for parents and in-laws to help a young couple buy a house. The parent can gift money to them, but must the young couple pay taxes on the money?  It is important to understand what taxes are–and aren't—owed on monetary gifts.  It is not at all unusual for the recipients of gifts, especially large cash amounts,  to wonder if they’ll owe income taxes on the gift.  However, a gift isn’t income; therefore, there’s no taxable income to the recipient.

Likewise, some parents and grandparents ask if gifts to the children, grandchildren, or others are deductible. Same answer: no. Gifts to other people are never deductible. The question probably stems from the fact that a charitable donation (a gift) is often deductible. But even charitable donations are deductible only if you itemize your deductions on your tax return.

Next, let’s look at the gift tax, which applies to lifetime transfers ( in other words, not an inheritance). The recipient of a lifetime gift won’t owe gift tax. It’s just the donor who’s subject to the gift tax. Even so, most folks never have to file a gift tax return because there are exceptions for gifts to a spouse and gifts under the annual exclusion amount. The annual gift exclusion is $15,000 in 2018. This covers most other routine gifts. Every taxpayer can gift up to the annual exclusion amount to an unlimited number of individual recipients with no gift tax consequences.

Therefore, a parent ( or each parent) could gift a child $15,000 with no reporting requirements. If the child is married, the parent can make the same gift to the spouse.

If the parent plans to gift more than the annual exclusion amount, then he’ll need to file a gift tax return. Even so, it’s unlikely that he’ll pay any gift tax.

A parent must claim any gift, in excess of the annual exclusion amount, as a deduction against his future estate tax exemption amount as reported on a Form 709 Gift Tax Return. The estate tax is a transfer tax at death and amounts more than the exemption amount is subject to the tax. That noted such taxable gifts are less of a concern now that the estate tax exemption amount is $11,220,000 per person in 2018.

Speak with an experienced attorney to review any gifting plans, before making any decisions.

Reference: nj.com (December 6, 2017) “Are taxes owed on gifts from in-laws?”


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