Giving the Gift of Money This Holiday Season: What You Need to Know
Tax Implications of Gifting Money to Family During the Holidays
The holidays are a season of giving, and for many, that includes financial gifts to loved ones. While gifting money may seem straightforward, there are important tax considerations to keep in mind to ensure your generosity doesn’t lead to unexpected complications.
Understanding the Annual Gift Tax Exclusion
The IRS allows you to gift up to a certain amount each year to any individual without triggering the federal gift tax. For 2024, this limit is $18,000 per recipient. Married couples can combine their exclusions, meaning they can give up to $36,000 per recipient without tax consequences. Gifts above this limit require filing a gift tax return, though it doesn’t necessarily mean you’ll owe taxes. These excess amounts count against your lifetime exemption, which is currently $13.61 million per individual.
When Does a Gift Become Taxable?
If your gifts exceed the annual exclusion and your lifetime exemption is already used up, a federal gift tax may apply. However, this is rare due to the high exemption limit. Importantly, gifts for tuition or medical expenses paid directly to the institution or provider are not subject to the gift tax.
Benefits of Gifting Strategically
Financial gifts can also serve as a way to reduce your taxable estate, particularly for those nearing the estate tax threshold. By gifting within the annual exclusion limit each year, you can transfer wealth gradually and tax-efficiently.
Other Considerations
- State-Level Taxes: Some states impose additional gift tax rules, so it’s wise to check local regulations.
- Impact on Medicaid Planning: Large gifts could affect eligibility for Medicaid if long-term care is needed within the look-back period.
- Documentation: Keep clear records of any gifts, especially if the amount exceeds the annual exclusion.