The Price of Generosity: Understanding The Gift Tax

Did you recently find out that a friend or family member would like to gift you with some extra cash? Or perhaps your grandparents would like to help you purchase your first home. Whatever the occasion, receiving an unexpected financial gift can be an exciting event, but it is important to know the potential tax consequences of your gift.

Federal Gift Tax Requirements

The federal gift tax applies to gifts made during an individual’s lifetime to another person. This is different from the estate tax, which applies to gift made from an estate upon death. If the gift you receive is from an individual who is still alive, the federal gift tax may apply.

The federal gift tax requires that certain individuals pay taxes for gifts that they give away to other individuals, regardless of whether the recipients are family, close friends, or complete strangers. But the threshold for paying the gift tax is exceptionally high.

As of 2017, each individual is entitled to gift up to 5.49 million dollars to another without having to pay the gift tax. This means that couples can give away  almost 11 million dollars without having to pay the gift tax.  When calculating whether the gift tax applies, it is important to remember that one can be “gifted” more than just money. The gift tax applies to the value of:

  • Your House
  • Stocks
  • Cars
  • Vacation Homes and Toys
  • Bonds

What Constitutes A Gift?

A gift under tax laws is anything that is given to another individual for which nothing is received, or for which less than fair market value is received. Fair market value is the amount of money that one would receive if the item was purchased in the market by a reasonable buyer.

If you give a gift to someone for less than fair market value, the “taxable” amount of the gift is the difference between the fair market value and what you received. For instance, if your car is worth $50,000 but you give it to a friend for $5,000, the value of the gift is $45,000. As discussed above, unless this number approaches the $5.49 threshold set by the Internal Revenue Service, you are unlikely to have to pay a tax.

Exemptions From The Gift Tax

Certain types of gifts are also exempt from tax under the tax code. For example, when you pay for your child’s tuition, books, and room and board at college, this does not constitute a gift that can be taxed. Additional gifts that are safe from taxation include:

  • Gifts to a Spouse
  • Gifts to Charity
  • Gifts to a Political Organization

Consult Romano & Sumner Before Making a Significant Gift

If you’re considering making a large gift to a family member, friend, or organization of your choosing, it is worth taking the time to make sure that your gift won’t expose you to a significant tax bill. The tax attorneys at Romano & Sumner LLC can help you to structure your gift in a way that minimizes tax consequences while allowing you to maximize your generosity. For more information, contact us online or at 281-242-0995.

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    Romano & Sumner, PLLC

    Romano & Sumner, PLLC