Christmas, birthday, and celebratory presents are all gifts we have given to our family and friends and probably never once considered the gift tax implications. For the most part, gifts to individuals are negligible and gift tax rules do not apply. However, if you are doing some hefty gifting to someone other than your spouse, you may need to consider the gift tax implications.
Gifts between married spouses are always tax free thanks to the current unlimited marital deduction, but gifts between non-spouses, such as to a child, need to be considered carefully. Each year the IRS provides an annual gift exclusion that allows taxpayers to gift away money or other items valued under a certain dollar threshold and not have to report the gift nor pay any gift taxes. For 2021, this annual exclusion amount is $15,000 per donor and donee. If the total combined value of gifts made from one donor to one donee exceeds the annual exclusion amount for the year, the excess must be reported on gift tax Form 709. However, this doesn’t necessarily mean that gift tax will be assessed on that amount. In addition to the annual gift exclusion, the IRS also provides a lifetime exemption amount. Any gifts over the annual exclusion amount will be applied to the lifetime exemption and will not be subject to gift tax until the full lifetime exemption has been utilized. For 2021, the lifetime exemption for one individual is $11,700,000. Taxpayers would need to be making some fairly large gifts to eat away at this exemption and trigger any gift tax.
Since the annual exclusion is applied on a donor by donee basis, married couples could combine their annual exclusions and gift one donee a combined total value of $30,000 and stay under this threshold. There are also specific exclusions for educational and medical expenses. These may not qualify as taxable gifts as long as the donor adheres to very specific guidelines provided by the IRS.
Let’s start with medical expenses. For a transaction to qualify for the medical gift exclusion, the donor must pay the donee’s medical expenses directly to the medical institution, which means the donor cannot give the donee money to pay for these medical expenses. Additionally, the payments must be made for qualifying medical expenses as outlined by Internal Revenue Code (IRC) Section 213(d). Some medical expenses will not qualify for exclusion, such as elective cosmetic surgery unless it is to correct a birth defect or disfigurement from injury or disease.
For educational expenses, the same guidelines apply in that the donor must pay the educational expenses on behalf of the donee directly to the educational institution and they must be for qualifying educational expenses, which in this case is only tuition. The cost of books, supplies, room and board, or similar expenses will not qualify for this exclusion. Additionally, the payment must be made to a qualifying educational organization as outlined in IRC Section 170(b)(1)(A)(ii).
There are a lot of things to consider when giving a loved one a gift. If you are planning on gifting large sums away, this could help reduce your wealth and exposure to estate taxes, but careful planning must occur to ensure there are no immediate gift tax implications to the transaction. If you have any questions about the tax implications related to a gift you are planning on making, reach out to our office to schedule a meeting with our knowledgeable tax staff who can help guide you through the potential ramifications and structure the transaction in the most tax-efficient way possible.