James D. Lynch
How Much Can You Give Away Without Tax Consequences?
The Internal Revenue Service considers a gift to be virtually any transfer of cash or property without receiving something of equal value in return. If any gift tax is due, it is the responsibility of the donor (not the recipient) to pay the tax. However, the rules provide two exclusions from the gift tax: the annual exclusion and the lifetime exclusion.
The annual exclusion is the amount you can give as a gift to one person in any given tax year. In 2020, the annual exclusion is $15,000. The annual exclusion is per recipient (NOT the sum total of all your gifts). This means you can give away $15,000 to one person and another $15,000 to another person without having any gift tax consequences. In addition, the donor is also on a per-person basis. So, a married couple can give a combined $30,000 to any one person with no gift tax consequences.
An individual who gives away more than $15,000 in a year to a single recipient must file a gift tax return for that year. But that does not necessarily mean they will owe gift tax that year. On top of the annual exclusion, there is also a lifetime exclusion of $11.58 million (as of 2020). So, if you give someone $25,000 this year, you will deplete your $15,000 annual exclusion, and the other $10,000 counts against your lifetime exclusion. You will also need to file a gift tax return. The purpose of the gift tax return is to keep track of a person’s remaining lifetime exclusion. Using the lifetime exclusion causes a reduction in the federal estate tax exemption upon the person’s death. If you don’t use any of your lifetime exemption during your life, then you have your entire lifetime exemption to use against your estate when you die.
Certain gifts are not subject to the gift tax at all. Gifts between spouses are unlimited. Gifts to nonprofits are considered charitable donations, not gifts. Payment of another person’s tuition or medical expenses in any amount will not incur a gift tax, provided the donor gives the money directly to the learning institution or the medical facility.