The tax implications of giving gifts

In the eyes of the IRS, a “gift” is when you give something of value and receive nothing or something of lesser value in return.

Gifts to qualified charitable organizations can be made in unlimited amounts without anyone – neither the donor nor the recipient – having to pay tax on the gift. Furthermore, such donations are eligible for a tax deduction for the donor.

On the other hand, gifts to non-charitable organizations may subject the donor to having to pay tax on the gift (but the recipient is never required to pay tax on the gift).

The IRS does not want you to give away too much of your wealth without you having to pay tax on some of it. Once you give away more than a certain amount during your lifetime, you need to start paying tax on any additional gifts.

Thankfully, there is an annual gift “exclusion” amount, which is $15,000 for 2021. This means you can give away up to $15,000 of cash, securities or property to as many people as you want during 2021 and there are zero tax or reporting requirements for anyone involved. However, once you give away more than $15,000 to someone this year, you have to report it to the IRS.

Even if/when you have to report a gift to the IRS – via filing a gift tax return - you likely still won’t have to pay tax on the gift. It’s only when the amount of your cumulative lifetime gifting in excess of the annual exclusion amounts exceed the “Basic Exclusion Amount,” or “BEA,” that you need to start paying tax on additional gifts. For 2021, the BEA is $11,700,000.

While the current BEA may seem quite large, it’s scheduled to be reduced by half starting in 2026. Furthermore, like all forms of tax legislation, it’s always subject to further changes or reductions.

Additionally, the BEA is shared between gifts you give away while you’re alive AND property or assets you bequeath to your heirs upon your death. To the extent the amount of your estate is larger than your remaining BEA, your estate will be subject to a federal estate tax. 

Gifting can be a great way to transfer wealth during your lifetime. However, be aware of the relevant limits and requirements around reporting and taxation.

For more information, check out my recent video.