What Are the Tax Implications of Gifting Money to Family Members?

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 circumstances.

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 circumstances 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:

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.

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