Gift-giving is a time-honored tradition that allows us to express our love, appreciation, and generosity towards the people we care about. Whether it’s a token of gratitude, a gesture of support, or simply a way to make someone’s day brighter, gifts hold immense significance in our relationships.
However, when it comes to giving substantial gifts to individuals other than our spouses, it’s essential to be aware of the potential tax implications that may arise. Gift taxes, a complex aspect of the U.S. tax system, can often catch us off guard if we’re not familiar with the rules and regulations governing them. In this blog post, we delve into the realm of gift taxes, exploring the intricacies and considerations involved when giving gifts to anyone other than your spouse, ensuring you have a solid understanding of the subject matter.
Spouse rules
When married, you can give what you want when you want to your U.S. Citizen spouse, and there is no estate tax or gift tax whatsoever under Federal or Maryland laws.
Maryland
Good news! Maryland does not tax gifts. Nor do you need to report gifts you make to the Comptroller of Maryland, no matter to whom you make these gifts.
Federal
The news isn’t quite as good under Federal rules but it’s not terrible. You can still give a large amount of money away during your lifetime without any gift tax implications. There are two pieces of the gift tax code – the annual exclusion and the lifetime exemption.
Federal Annual Exclusion
Each year you can give up to $17,000 to as many people as you want without the need to file a gift tax return with the IRS. If you are married, the same rules apply – each spouse has a $17,000 annual gift tax exclusion for a total of $34,000 per couple. You don’t report this to the IRS. However, you can’t give any one individual more than $17,000.
For example, if you have three children, seven grandchildren, and ten best friends from kindergarten, you can give away a great deal of money in 2023. You can give each person $17,000 for a total of $170,000 in 2023 without any gift tax or reporting implications. Each child, grandchild, and best friend can receive $17,000. There’s nothing for you to report and nothing for the recipient to report. And no tax is owed.
Federal Lifetime Exemption
You may find that you want to give someone more than $17,000 in 2023. You can do this so long as you keep in mind a few things. Under 2023 rules, you can give, whether alive or at your death, a total of $12,920,000. You can slice and dice this any way you want. You can give your gifts during your life or give nothing during your life and give this all at death. Furthermore, you can give this total to one person or as many as you want. If you give an individual more than $17,000 in 2023, the first $17,000 falls under the Federal Annual Exclusion. The amount over $17,000 falls under the Federal Lifetime Exemption. The amount over $17,000 is reportable to the IRS using Form 709, which is due April 15 the year after the gift is made.
Here’s another way to look at it. If you have a dear friend who you met after he became a prominent and nationally recognized expert in his field, but you never discussed your business dealings with him, and you wanted to take him on vacation, you could do so even if the vacation costs $500,000 per person. You could fly your close friend and his wife on your private jet to your private island, and then host them and pay all of their expenses. The first $17,000 of the gift to your friend and the first $17,000 of the gift to your friend’s wife would fall under the Federal Annual Gift Exclusion, and there are no reporting requirements. But the amount over $17,000 for each person must be reported on a Federal Gift Tax return. The form you would use is Form 709, and it’s due April 15 the year after the gift. The amount to report for your friend would be $483,000, and the amount to report for your friend’s wife would be $483,000.
Who really makes gifts
Parents regularly gift money to their kids to help out with a first home down payment; a grandchild’s education; a grandchild’s summer camp; even day-to-day living expenses. So long as the total gift to each individual for the year is under $17,000, no forms need to be filed. But, if a person gives his dear close friend a $500,000 vacation, the IRS needs to be told about it using Form 709. Any tax owed is usually by the gift giver, and any filing requirements are generally on the part of the gift giver. So be generous and kind, but consult with your accountant about meeting the IRS’s rules regarding gifts.
In conclusion, navigating the realm of gift taxes when giving to anyone other than your spouse requires careful consideration and understanding. While the tax rules surrounding gifts can be complex, it’s important to stay informed and seek professional advice to ensure compliance with the law. Remember, the purpose of gift taxes is not to discourage generosity, but rather to maintain the integrity of the tax system. By being mindful of the annual exclusion limits, understanding the lifetime exemption, and exploring available tax strategies, you can minimize the impact of gift taxes and continue to foster meaningful relationships through the act of giving. So, as you embark on your journey of gift-giving, keep these thoughts in mind and let the joy of sharing be the guiding force behind your gestures of love and appreciation.