If you give away generous sums of money to a friend or family member, you may be required to pay a gift tax to the IRS. However, with a little planning, you can afford to be quite generous before you have to break out Form 709 to report the amount and be on the line to pay extra money.
Here are three easy ways to steer clear of the gift tax.
1. Double (or quadruple) your limit.
The key to avoiding paying a gift tax is to give no more than the annual exclusion amount to any one person in a given tax year. For 2020, that amount is $15,000. This means if you want to give ten people $15,000 each in one year, the IRS won’t care. However, if you give $16,000 to just one person, you must pay a gift tax.
The annual exclusion amount does rise periodically due to inflation, so it’s important to double-check the amount each tax year to ensure you don’t give over the limit.
Being married is an easy way to double your giving power as both you and your spouse are entitled to the annual exclusion amount on a gift. As long as the gift is given from joint property, the IRS considers the gift to be half from each. Therefore, you and your spouse can give $28,000 total.
The same rule applies when you give to someone who is married. You can give an additional gift of up to $15,000 to the recipient’s spouse, making the annual limit from one couple to another couple $60,000 ($15,000 X 4 = $60,000).
2. Pay medical bills or tuition directly.
While it may seem giving a check for $50,000 to a grandson about to head off to college is the same as writing the check directly to the college, to the IRS it’s very different.
A check written to a college for tuition does not count as a gift for purposes of the gift tax. However, a check written to your grandson, regardless of what he does with it, is considered a monetary gift.
The same is true for medical bills. If you pay the money directly to the medical institution, it’s not a gift.
If you’d like to help a family member with college or medical expenses, it may be best to pay the institution directly to avoid any extra taxes.
3. Spread the gift out between years.
If you’re tempted to make a large gift for the holidays, consider splitting the gift into two checks instead.
For example, if you want to give your single adult son $20,000, first write him a check for no more than $14,000. Then wait until the New Year to give him the remaining amount.
What if you’ve already given more than the gift tax limit?
Filing a gift tax return is not difficult, and in some cases, you may not owe any tax yet.
The dollar amount over the annual limits is added up throughout your lifetime. You don’t owe any tax until it exceeds the total lifetime limit. For 2020, the limit is set at $11.58 million per person.