Whether you’re considering helping with the down payment for a home, supporting a child’s or grandchild’s higher education expenses, or providing support to an elderly family member or friend, gifting money can be an impactful and meaningful way to share your wealth while simultaneously making a difference in the lives of your loved ones.
At Dunnigan Financial, we understand there can be some uncertainty about how the gift-giving process works, particularly regarding tax expectations and ramifications. Still, we’re here to reassure you that giving monetary gifts is more straightforward than you may expect.
If you’re considering gifting money in the near future or just seeking out some preliminary information before getting started, here is a comprehensive guide of facts about gifting money to loved ones.
What is Considered a Taxable Gift?
According to the Internal Revenue Service (IRS), gifting money includes “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.” In other words, transferring money or valuable assets (such as property) to another person will likely be considered a gift and can potentially be taxed. Certain types of gifts can be excluded as a taxable gift, such as:
- Gifts that are not more than the annual exclusion for the calendar year.
- Tuition or medical expenses you pay for someone (the educational and medical exclusions).
- Gifts to your spouse.
- Gifts to a political organization for its use.
Annual exclusions are another way for gifts to overcome tax requirements, but more on that later.
Benefits of Gifting Money
Gifting wealth to loved ones in your life can benefit them immensely. For adult recipients, gifting money can help them find financial freedom through the ability to pay off debts and alleviate other financial burdens. For children and young adults, gifts can help teach them the basics about money, stocks, and the value of financial flexibility.
Furthermore, while gifting money can bring benefits in the short term, such as helping a child or grandchild pay for college, it can also provide future benefits through the reduction of future estate and inheritance taxes down the line—consider discussing this with a financial planner to learn how this might work in your situation.
Annual Exclusions Can Prevent Taxation
One of the first facts you should know about gifting money is that your gifts may not immediately be subject to taxation. Each year, the IRS lays out annual exclusion levels that can be applied to gifts given to a unique donee—in 2024, for example, all financial gifts cumulatively less than $18,000 are exempt from taxation.
In other words, as long as your gifts to one individual are less than $18,000, no taxes will be applied, and even if you gift $18,000 to four different children, there will still be no need to report the gifts. Only if your gifts exceed $18,000 per donor per year will you be required to report the gift, which will contribute to your lifetime giving limit, which, as of this year, has been set at $13.61 million.
The Recipient Doesn’t Have to Pay Gift Tax
A common concern with gift-giving is that the money will be taxed and must be paid for by the recipient. However, the donor is generally responsible for paying the gift tax (or tallying towards exclusion amounts/lifetime limits). The donee may be able to agree to pay the tax instead under some exceptional circumstances, but you should always consult with a financial advisor or tax professional if you’re considering this route of action.
Another exception to this rule is if the gift recipient ends up selling. For example, if you gift a property or stock in a company and the donee later sells that gift, they will be subject to pay tax themself. Note that the rules differ for property acquired from an estate, so be sure to consult with your financial advisor or tax professional for information about what to do in this arrangement.
Gift-Giving is Not a Deduction
According to the IRS, gifting money or leaving your estate to your heirs cannot be deducted and will not ordinarily affect your federal income tax. However, while the value of your gifts cannot be deducted from your income tax, gifts given to charitable organizations may be deducted. Once again, always consult with your tax professional or financial advisor for help, or see Publication 559, Survivors, Executors, and Administrators for more information about whether gift tax or estate tax applies to your situation.
Gift-Splitting Can Increase Exclusion Amount
It’s essential to be aware that gifts given by two married individuals are entitled to exclusion amounts for each individual. This means that a property owned by a couple and gifted as a gift, for example, can receive $36,000 ($18,000 × 2) in annual exclusions. Be sure to consider this as a viable option when determining the best type of gift-giving because maximizing annual exclusion amounts will benefit you, your family, and the donee. For more information about gift-splitting, consult your tax professional and financial advisor or see the Instructions for Form 709 about Gifts to Donees Other Than Your Spouse.
Alternative Forms of Gifts are Effective
Gift-giving does not necessarily mean it needs to be a gift of cash, and alternative forms of gifts can be an effective way to benefit your loved ones. For children and young adults, consider giving gifts in the form of stocks or tax-advantaged accounts like Roth IRA and 529 college savings plans that can provide just as much financial value while simultaneously providing an educational opportunity around the way the stock and investment market works.
For adults, gifts can be given in the form of loans—for example, if your son and his wife want to start a business and you wish to help them, you can provide them support through loaned funds. Be sure to clearly spell out the terms of this agreement in writing and structure it so that it can benefit them while also ensuring that your finances are not sacrificed in the future.
Consult a Financial Advisor for Help With Gifting
As you can see, gifting money to loved ones is ordinarily straightforward when you stick under the annual exclusion amount provided by the IRS each year. But if you’re considering larger gifts or giving them through different means and channels, it’s worth taking the time to discuss with a financial advisor. Their objective is to help you gift money most effectively and beneficially for you and your donee and to streamline the regulatory and tax side of the process.
If you need help or want to discuss your details, don’t hesitate to contact Dunnigan Financial.