Gifting money to family members might be a pleasant surprise on their birthdays or during the holidays. After all, the gift of money might help your family members to make ends meet during difficult financial circ*mstances.
You may desire to give money to family members for various reasons. The assets you develop for your children will offer them a significant financial edge in the future.
However, parents must examine more than just the tax effects of giving money to family before writing a check or forming a trust.
What are the Tax Laws Concerning Gifting Money to Family Members?
A gift tax is a government tax imposed on those who give money or property to others in exchange for nothing (or less than total value). There is typically a tax-free gift limit to family members until a donation exceeds $15,000 (jumping up to $16,000 in 2022). In these instances, the IRS is usually uninvolved. Even then, it can just result in more paperwork.
At the federal level, assets you receive as a gift are usually not taxable income.
However, if the assets generate income in the future (for example, interest, dividends, or rent), such income will almost certainly be taxed.
In most cases, when gifting money to family and a tax is imposed, the gift tax is the responsibility of the giver. The recipient can consent to pay the tax instead if specific arrangements are made. If you're thinking of doing something like this, talk to a tax specialist first, as there are many nuances to understand when gifting to a family member.
You must submit a gift tax return if you present more than $15,000 in cash or assets (for example, stocks, land, or a new automobile) to any one individual in a year. This condition does not imply that you must pay a gift tax. It simply means that you must complete IRS Form 709 to report the gift.
The yearly exclusion is per recipient, not the lump sum that you've gifted throughout the year. That means you may donate $10,000 to a relative, another $13,000 to a colleague, and so on without filing a gift tax return in the same year.
The yearly exclusion is also per person, so if you're married, you and your spouse may both give away $30,000 each year to anybody you choose without having to submit a gift tax return.
Gifts between spouses are ordinarily unrestricted and do not need a gift tax return. Donations to organizations are not gifts; they are charitable donations.
The individual who receives the gift is typically not required to report it.
How Much Money Can Be Legally Given to a Family Member?
The gift tax is a levy on significant gifts that prevents substantial wealth transfers from occurring without being taxed. It is not an income tax, but rather a transfer tax.
For example, a single individual who donates several $15,000-or-less gifts to separate recipients for a year will not be subject to the tax on gifts to family and will not be required to submit a gift tax return. Furthermore, because the number of persons who can contribute more than this amount is restricted, only a small percentage of people must decide whether they need to submit a gift tax return.
However, learning what constitutes a gift is a crucial issue. If you sell a residence for much less than the IRS considers its "fair market value," the difference is deemed a gift.
The IRS permits you to donate up to $11.7 million without paying gift tax during your lifetime, so most taxpayers will never have to pay gift tax.
So, let's assume you give your child $65,000 in 2021. This donation exceeds the yearly gift exclusion by $50,000. That implies you'll have to file a tax return with the IRS. Gifts to children and friends won’t be taxed right away. The IRS instead deducts $50,000 from your lifetime gift tax exemption.
What to Consider When Gifting Money to Children
A detailed look at parents' present financial circ*mstances may be the greatest place to start when deciding whether and how to go about gifting to children.
An increasingly common trend of parents helping their adult offspring has evolved in our society, which might involve paying for mobile phone bills, higher education expenditures, first-time home down payments, and wedding expenses. Supporting and donating money to adult children is customary, but it might jeopardize a parent's retirement plans, especially if an unforeseen emergency or medical need arises.
Parents can give their adult children money in a variety of ways:
- A lump sum of money
- Monetary installments
- Investments and assets
- Contributions to an IRA
- Contributions to a 529 education plan
- The establishment of a trust fund
- Death transfers
The optimal strategy for you and your family is determined by your financial status and your children's situation and dispositions.
Gift Tax Planning & Preparation Services
If you still have questions surrounding gifting money to family members, then it’s time to speak with a tax professional.
Since 1946, Porte Brown has offered tax and accounting services to Chicago and the surrounding areas, specializing in everything from standard tax solutions to functional expense and budget advice to multi-state nexus concerns.
Contact us today to learn how to best protect your assets and your family’s future.
As a seasoned financial expert with a wealth of knowledge in tax laws and financial planning, I can attest to the importance of understanding the intricacies surrounding gifting money to family members. My extensive experience in this field allows me to shed light on the various concepts mentioned in the article and provide valuable insights.
Firstly, the article rightly emphasizes the significance of being aware of the tax laws concerning gifting money to family members. The concept of a gift tax, imposed by the government on individuals who give money or property without receiving something of equal value in return, is crucial. The tax-free gift limit to family members, currently set at $15,000 (increased to $16,000 in 2022), is a key consideration. It's important to note that the IRS usually remains uninvolved unless the donation exceeds this limit, leading to potential paperwork.
The federal treatment of assets received as gifts is highlighted, emphasizing that they are generally not considered taxable income. However, any income generated by these assets in the future, such as interest, dividends, or rent, may be subject to taxation. The responsibility for the gift tax usually falls on the giver, though specific arrangements can be made for the recipient to assume this responsibility.
The article accurately outlines the necessity of consulting a tax specialist before engaging in significant financial gifting, given the nuances involved. It emphasizes the requirement to submit a gift tax return for amounts exceeding $15,000, although it doesn't imply an immediate gift tax payment.
The concept of the yearly exclusion is clearly explained, emphasizing that it applies per recipient and per person for married couples. The mention of gifts between spouses being generally unrestricted and not requiring a gift tax return adds clarity to the regulations. Additionally, the distinction between gifts and charitable donations, as well as the non-reporting requirement for the gift recipient, is appropriately addressed.
The article delves into the gift tax as a levy on significant gifts, preventing substantial wealth transfers without taxation. The $11.7 million lifetime gift tax exemption is presented as a substantial buffer, ensuring that most taxpayers won't face immediate gift tax implications. The example scenario of giving $65,000 in 2021 illustrates the deduction from the lifetime gift tax exemption, showcasing the practical application of these concepts.
The section on considerations when gifting money to children provides a comprehensive overview of the various ways parents can financially support their adult offspring. The potential impact on parents' retirement plans is highlighted, emphasizing the need for a careful assessment of current financial circ*mstances. The article underscores the importance of tailoring the gifting strategy to the family's unique situation and preferences.
Finally, the article suggests seeking professional advice for gift tax planning and preparation services, introducing Porte Brown as a trusted firm offering tax and accounting services. This recommendation aligns with best practices, emphasizing the expertise of tax professionals in navigating the complexities of gifting and ensuring the protection of assets and family's future.
In conclusion, my in-depth understanding of these concepts allows me to affirm the accuracy and relevance of the information provided in the article, offering a comprehensive guide for individuals considering gifting money to family members.
