Giving Away Money? Know the Tax Laws

Feeling generous? Want to give a gift of cash or something equivalent to a family member or friend? You should understand the tax implications.

There are numerous reasons why you might want to give a gift to someone you know. Maybe a family member has gone through some hard times, or a friend’s child needs help with school tuition. Or you’ve come into something of a windfall and just want to share the wealth.

The IRS has very clear rules about the tax implications of gifting. So before you bestow a part of what you own to someone, check with us to make sure you understand when taxes might be due.

What about small gifts?

TaxTips0214image1_zps6fac521fYou don’t have to worry about the hundred-dollar bills that you tuck into holiday or birthday cards, though the IRS considers any gift to be taxable.

The agency defines “gift tax” as applicable when you give something to another person without the expectation that you’ll be getting something at least equal in value in return. These “somethings,” according to the IRS, can be:

  • Tangible or intangible property, which includes money
  • The use of property, or
  • The right to receive income from property.

The IRS may also assess a gift tax in situations where you sell something for a price that is less than its value, or if you offer someone a reduced-interest or interest-free loan.

If all gifts are taxable, why have I never had to pay a gift tax?

There are many exceptions, including gifts that go to:

  • Your spouse
  • A political organization for its use, and
  • Charitable contributions.

If you send money to an educational institution for someone else’s tuition or to a medical facility for expenses incurred by another individual, you do not have to pay gift tax.

The most common scenario involves the outright gifting of cash to someone other than a spouse. These gifts are only taxed if they consist of an amount that’s greater than the annual exclusion for the calendar year. Which means you can give away up to $14,000 to as many people as you want for the 2014 tax year without being taxed.

What happens if you give more?

TaxTips0214image2_zps74b1f87bIf you, for example, give your adult son $30,000 because he’s buying a house and you want to help with the down payment, the first $14,000 of that is not taxed, thanks to the annual exclusion.

And the remaining $16,000? That may or may not be taxed, depending on something called the “applicable credit.” We can help you calculate in a situation like this. Even if no gift tax is due here, though, you will have to file a gift tax return. There are other scenarios where this would also be required.

You can be generous without being taxed. But be sure you know exactly where the lines are drawn.

About Brenda J. McGivern, CPA

Brenda McGivern started her own certified public accounting and management consulting firm in October 2001. The full service CPA firm provides tax and accounting solutions to meet the needs of today's small business and individual. Brenda McGivern has become a trusted advisor and valuable resource her clients rely on for timely, accurate assistance when they need it. Before starting the firm, she worked as an accountant for three years at a local firm and prior to that five years at a large international CPA firm in Boston. She has performed the following tax services: federal, state and local tax planning, international tax planning, estate and succession planning, mergers and acquisitions, capital retention and IRS representation. She has also coordinated assurance engagements, such as financial statement audits, reviews and compilations from the planning phase through the reporting phase. She has prepared and reviewed regulatory filings for numerous regulatory agencies including the Security and Exchange Commission. Prior to these positions she was selected from over 2,000 candidates into an eight-person intensive financial management program at an international technology company. The program consisted of graduate level classroom study and two six-month rotational assignments in financial operations. She graduated cum laude from the University of Massachusetts at Amherst and holds a Bachelors Degree in Business Administration with a concentration in accounting. McGivern also holds a license in Massachusetts as a Certified Public Accountant and is a member of the American Society of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. She resides in Stoughton, Massachusetts with her husband Brian, and their sons Sean, Ryan and Conor and their dog, Davis.
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