Many people are often confused by tax laws, and with good reason. The laws governing our taxes are complicated and overwhelming, and most people only think about their taxes once a year when they file them. When consulting with a tax professional or filing your taxes using online software, you may get even more confused when you’re asked about any gifts that could constitute a taxable gift. The following guide should help clarify what gifts are taxable income, and what gifts do not need to be claimed on one’s tax return.
Defining gifts
In tax terms, a “gift” is any monetary transfer, either direct or indirect, which is made to one individual and not reciprocated by the person receiving it. A piece of property also constitutes a gift in the eyes of the Internal Revenue Service, with some exceptions. If you receive a gift, you, personally, are not taxed — it is the gift giver who is responsible for paying the tax.
As long as the gift’s monetary value is below the annual exclusion for all tax years ($15,000 in 2018), you do not have to pay taxes on it. The annual exclusion applies to each gift; not the sum total of gifts you give in one year. That means that if you decide to give each of your three children ten thousand dollars, you will not owe taxes on these gifts, despite the fact that you gave out double the annual exclusion.
What about business gifts?
You may hear that if you give someone a gift as part of your business (for example, during holidays), you may be eligible to write off the gift. Gifts given for business purposes may qualify to be written off, but only if the value of the gift does not exceed $25. That means that you have to be careful with what gifts you’re giving, assuming that you value the write-off. While monthly subscriptions, such as coffee gifts, may be less than $25 monthly, if the total annual value exceeds that $25 then you will not be able to write off more than $25.
Larger purchases like trips or vacations
While giving the gift of property is a taxable event, depending on the property’s value, as long as the trip in question has a fair market value lower than the annual exclusion, you should be safe. So go ahead and spring for the airfare and surf lessons in Waikiki, or offer the Oregon Coast Experience to a friend or loved one without the fear of being taxed on these great gifts. That said, it is important to keep in mind that gifting someone a more expensive trip or leaving them a vacation property may trigger a taxable event.
Other exclusions to consider
Other gifts that are excluded from these rules (even if they exceed the annual exclusion) include gifts to your spouse, gifts to charities, and gifts to political organizations. Additionally, as long as you are paying the institution itself, paying somebody else’s medical bills or tuition as a gift does not constitute a taxable event. Keeping these exceptions in mind is helpful when considering whether or not to give such gifts.
It is worth noting that it’s always best to still consult with a tax professional if you are ever unsure about what may or may not qualify as taxable income. Tax laws are always changing, and discussing your concerns with someone who has years of experience filing taxes for others is the best strategy when it comes to ensuring that you are not liable for extra taxes you weren’t aware you owed.