If you plan to gift a sizable amount of money to a loved one, gift tax should be on your radar. Gift tax is a federal tax imposed on transfers of cash or property valued above a certain threshold. Gift tax is paid by the gift giver, not the receiver. Fortunately, there are several ways you can still give generous gifts without being responsible for taxes. Here are five ways you can give tax-free gifts:
1. Stay within the IRS Gift Tax exclusion
The annual gift tax exclusion is the amount of money you can give away each year before the gift tax kicks in. In 2022, you won’t be responsible for gift tax unless you give a friend or family member cash or property worth more than $16,000 per year. If you’re married and file a joint income tax return, you can gift up to $32,000 per year without paying taxes.
2. Spread out your gift over time
You can spread a gift over a few years to avoid gift tax if you don't exceed the gift tax exclusion in one year. Giving your gift over several years is an excellent strategy if your goal is to maximize the amount of money you give but wish to reduce your tax burden at the same time.
Let’s say you want to gift your son or daughter $25,000. To avoid gift tax, you can give them $12,500 for their birthday in 2022. You could then wait until 2023 to provide them with the remaining $12,500, so you don’t have to pay gift tax.
3. Give a gift to help cover medical expenses.
If your gift is for medical expenses, you may not have to pay gift tax if you pay the medical facility or insurance company directly. You will, however, be subject to gift tax if you write a check to the recipient instead. If you want to cover your parent's nursing home stay, for example, you can ask the nursing home to bill you so you can pay for your mother's or father's medical costs without exceeding the annual gift limit.
4. Help pay for education expenses.
Like gifts for medical expenses, educational gifts can also be exempt from gift tax if they're directly paid to the college, university, or other institution. You may pay for tuition and other qualifying expenses without worrying about gift tax. Unfortunately, gifts intended for books, supplies, and room and board will go toward the annual gift limit.
5. Leverage your marital status
The gifts you give will be considered separate from your spouse's gifts. That's why it's a good idea to give gifts together. In 2022, you'll each be able to donate up to $16,000 without exceeding the annual gift tax limit.
Consult a financial professional
A financial professional can help you work towards designing a strategy that will seek to save as much as possible on gift taxes. Contact us today to get started.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
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https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes https://www.federalregister.gov/documents/2019/11/26/2019-25601/estate-and-gift-taxes-difference-in-the-basic-exclusion-amount https://www.hrblock.com/tax-center/income/other-income/do-i-have-to-pay-taxes-on-a-gift/