You’ve just been gifted a sum of money either by a relative, or through a deceased person’s will. And you are wondering “What tax implications come with it?”
What Does “Gift” Actually Mean?
A gift is something given without the expectation of something in return.
When someone gives you money, with or without a reason, and it’s done without the expectation of being paid back, or something in return, it’s considered a gift.
Additionally, if someone sells you something, such as a house or a car, for less than fair market value, the difference between the sales price and the fair market value will be considered a gift. For instance, if your dad owns a vehicle that would normally sell for $20,000, but sells it to someone (like one of his kids) who needs it for $13,000, the $7,000 difference is considered a gift. Or if you decided to sign over a car you own to your adult child, that is considered a gift, in this example, of $20,000. According to the IRS, you can give any individual up to $17,000 in 2023 without you having to pay any tax on that gift, which means that if the fair market value of the car is under $17,000, you won’t have to pay a federal tax on a car gift. In this example, your dad would have to pay though on the $3000 as it exceeds the $17,000 allowable.
Taxes Are Paid by the Giver
Gift recipients aren’t required to pay gift tax, but those who give or “gift” monies and assets are subject to federal and state laws. The tax liability will depend on how much was gifted.
- If your parent gives you a $100 check for Christmas, generally, the answer is no – no tax liability
- If someone gives you a sum in excess of $17,000*, then the giver known as the donor will have to file a gift tax return for it
- But if the giver/donor fails to file that gift tax return for an amount of over $17,000, the IRS may decide to collect it from you, the recipient.
Recipients generally don’t pay a gift tax on money given to them.
As of 2023, an individual can gift up to a total of $17,000 per year to one or more individuals at a time. That means if you’re gifted $7,000, and your two siblings receive $5,000, the giver has reached his or her limit for the year. Go over that, and the giver is required to file a gift tax return, letting the IRS know that the threshold has been reached for the year. A married couple can each give $17,000 per year before the threshold is reached.
Back in 2020, individuals could give up to a lifetime federal limit of $11.58 million and $4 million on a state level. Married couples can each give away that much, essentially doubling their gift amounts. Please check with your CPA or tax attorney if you are concerned about your lifetime federal limit.
Items That Could Require A Gift Tax Return For The Giver
While these are not things people normally think about as tax-affected gifts, they usually are:
- Paying college tuition for children or grandchildren
- Wedding and/or honeymoon expenses
- Paying off debts (i.e., credit cards, cars, etc.)
- Down payment on a house
If someone is paying medical or educational expenses on your behalf, making payments directly to the medical or educational institution may help them avoid the requirement to file a tax return. Consult with your CPA or attorney regarding IRS Form 709 or review IRS website for more information.
James C. Provenza, Chicago area CPA and Estate Planning Attorney
Are you considering gifting money to your family members? Have you received money or property and have questions? Please contact the office of James C. Provenza & Associates. With over 40 years as an attorney and Certified Public Accountant(CPA), Mr. Provenza is uniquely qualified to give solid legal and tax planning advice.
It’s never too early to begin your estate planning to ensure your estate plan is designed to benefit you and your family and loved ones. For estate planning advice from an experienced lawyer and tax planning professional, call James C. Provenza & Associates today at (847) 729-3939 or use our online contact form.
*This post updated as of May 1, 2023