One of the greatest feelings in the world is to give another person a gift. But the giver (“donor”) needs to be aware that giving a gift may trigger tax-reporting requirements. In certain situations, the IRS requires a donor to report a gift and file a gift tax return. The donor, not the recipient (“donee”), is generally liable for any resulting gift taxes associated with the gift.
Generally, when a gift over $15,000 is made to one person, the donor is required to file a Form 709, United States Gift (and Generation-Skipping Tax) Tax Return. For 2018, the IRS increased the gift tax exclusion to $15,000.
In determining the now-$15,000 threshold, the IRS looks to the total gifts made over the course of the year. A donor cannot avoid the reporting requirements by making several gifts to a person of less than $15,000 when the total gift amounts aggregate to over $15,000 in a tax year. If the taxpayer is married, however, the exclusion doubles because each spouse can gift a person $15,000. Importantly, the IRS allows a single taxpayer to exclude up to $11,180,000 ($22,360,000 for married couples) of total gifts during their lifetime. Most people do not exceed this exclusion, so few taxpayers will ever actually pay a gift tax.
Certain exceptions apply in determining a donor’s gift tax liability. IRC § 2503. The following qualified transfers are not taxable as gifts under IRC § 2503(e) and, thus, are not required to be reported. First, a donor is not required to report the payment of tuition or educational expenses made directly to an educational organization. IRC § 2503(e)(2)(A). Additionally, a payment made to a person providing medical care to another person is not taxable. IRC § 2503(e)(2)(B). If a person waives their right to receive pension payments to another person, the transfer is not a gift for tax purposes. IRC § 2503(f). If a person plans to make a transfer that may be a qualified transfer, the person should make sure they are following the particular steps to qualify for the exceptions. Otherwise, the taxpayer may be liable for a gift tax and be required to file a gift tax return.
When a taxpayer decides to give a gift to another, they should be aware of the potential reporting requirements. Annual gifts under $15,000 (or $30,000 if married) to a single person do not require the donor to file a gift tax return. Taxpayers should also consider the qualified transfer provisions and be aware of the potential tax implications when a gift is made.