As we head into the last few months of the year, it is time to start thinking about gift giving. Yes, the holiday season is rapidly approaching, but so is the end of the tax year. If you haven’t done so already, it is time to start thinking about what gifts and charitable donations you need to make by December 31 to meet your estate planning and tax reduction goals.
What’s the difference between a gift and a charitable donation?
Before we get too far into the weeds, let’s work on some basic terminology. Gifts and charitable donations may seem similar to you when you are making them, but they are treated quite differently by the IRS.
A gift is the transfer of assets to an individual. Giving a gift does not typically impact your federal income tax obligations, but it might mean you have to do a little paperwork for the IRS so they know whether you owe any estate taxes when you die.
A charitable donation or contribution is the transfer of assets to an organization. A charitable donation may lessen your yearly tax burden and your estate taxes, and it will necessitate some paper shuffling.
There’s paperwork involved?
Most people know that there is some paperwork involved with making a charitable donation, but few realize that gift-giving may also require some tree-murdering.
If you give a gift worth more than $15,000 to someone this year, you need to fill out a gift tax return, IRS Form 709. You may not think you have given such a gift, but things like paying for weddings, and buying a car for a new driver in your family count!
The IRS uses Form 709 to determine if you owe any gift taxes this year, or if you will owe any estate taxes later. You see each year you can give $15,000 per person to as many people as you would like without paying any taxes on it. This is called the annual exclusion. But you can also give $11.2 million dollars away during your life without paying any gift taxes or estate taxes, this is known as the lifetime exclusion.
So, if you give your favorite cousin a car worth $20,000 this year you will have to fill out Form 709. However, you won’t owe any gift taxes even though the gift is worth more than $15,000 unless you have already given away over $11.2 million. Gifts worth more than the annual exclusion essentially dip into the lifetime exemption bucket.
If you are married, you can double up on your annual exclusions and lifetime exemptions, and give away a joint $30,000 per person per year and $22.4 million over your lifetimes. You may also give an unlimited amount to one another without paying any gift taxes.
Gifting is one of the best ways to reduce your annual tax burden and transfer wealth without paying taxes. If you haven’t maxed out your giving this year, it’s time to get started so you can maximize your tax savings before the New Years ball drops.