You have worked very hard to build your wealth and now you want to share it with your loved ones, but you’re scared. You worry about the Gift Tax Return. There are so many misconceptions about giving gifts. Let’s clear a few of them up.
Common Misconceptions
Misconception #1: Gifts are taxable.
The first misconception is gifts are taxable. For 99.9% of Americans, that is not the case. The IRS has a lifetime exclusion limit for 2024 that is $13.6 million dollars. I’m not sure about you, but most of my clients are not going to give 13 million dollars over their lifetime. Therefore, none of their gifts are going to be taxable. They may have to file a gift tax return, so keep that in mind.
Misconception #2: Only the wealthy have to file gift tax returns.
The second misconception is only the wealthy have to file gift tax returns. That is simply not true. The IRS sets an annual gift limit. If you exceed that limit, you’re required to file a gift tax return. For 2024, that is a whopping $18,000. That is not just for the wealthy.
How Are Gift Tax Returns Handled?
Now, let’s talk about how gift tax returns are handled. If you give over $18,000, in 2024 to 1 person, you are required to file a gift tax return. It is an informational return only. It’s filed just like your individual income tax return. Basically, when you file the return, it goes over to the IRS, the IRS says “Michelle Davis has 13.6 million dollars to give and she gave a gift of $100,000. Now she only has 13.5 million to give.” The gift amount just keeps coming off of the balance, one gift tax return at a time.
NOTE: You will never hear from the IRS (most likely) unless there’s an issue. The person you gave the gift to doesn’t receive anything either. It is simply your responsibility to file the gift tax return as the person giving the gift.
Exclusions For Gift Tax Returns
Now, there are a few exclusions that you do not need to file a gift tax return for:
- Political organizations
- Charitable organizations
- Your spouse- you never have to file a gift return when you’re giving something to your spouse
- If you pay someone’s medical expenses or tuition fees, as long as you pay the institution directly, does not require a gift tax return.
Tax Strategies
Let’s talk about some strategies.
As mentioned earlier, you can give $18,000 per person in 2024 and not have to file a gift tax return. If I have a grown child, he has two kids and a spouse, well, I can give $18,000 to all 4 of them. If I’m married, my spouse can also give them $18,000 each. That is almost $150,000 and no gift tax return is required.
Another way that you could strategize is if you are in the month of December, give them $18,000 now and $18,000 in January.
If you want to pay for your grandchild’s education, pay the institution. No gift return is required.
Finally, gift returns can be a wonderful tool when it comes to estate planning. Make sure you talk to your estate planning attorney about how you can incorporate gift giving into your plan.
We know this can be confusing and stressful, and we have made it our mission to unravel it all. Taking you from confusion to clarity, Accountabilities has you covered.