Does This Count as a Gift?
The Top 5 Gifting Mistakes People Make
If you’re looking to help pay for your child’s wedding or give a little extra during the holiday season, many people are unaware that a tax grinch is lurking around the corner waiting to get you for doing a good deed. So who or what is this? It’s a federal tax on transfers of property or money to other people while getting nothing (or less than full value) in return.
When giving a gift to your loved ones, you can potentially receive a tax rate from 18%-40% on the gift given. However, must small gifts do not count as there is an annual and lifetime exclusion (described in greater detail below).
Below we have outlined the 5 most common mistakes individuals make regarding gifting:
- Not understanding what constitutes a gift – Whether it’s college tuition, paying for a wedding, or loaning money to a friend, all of these acts constitute a gift once they go over the annual exclusion limit and lifetime exclusion limit.
- Gifting over the annual limit – For tax years 2020 and 2021, the annual exclusion is $15,000 per individual/$30,000 per married couple. The limit is per recipient annually, and gifts to non-profit organizations are counted as charitable donations. In addition, there are lifetime exclusions tied to gifting (increasing to $11.7 million in 2021) that will affect your estate planning strategy.
- Expecting a tax deduction for a gift – Unfortunately, people think that gifts and charitable donations are the same thing. When you provide a gift, this is not a tax-deductible event you can write off on your taxes.
- Not filing a gift tax return – Many individuals or couples that gift over the annual limit forget to file a gift tax return, or IRS Form 709. This does not mean you will owe taxes, but you are required to disclose it.
- Not paying institutions directly – A common mistake is not paying tuition or medical bills directly to a college or hospital on behalf of the giftee. When the payments are made to these institutions, they are not subject to the same annual exclusion.
Are you someone that has questions about gifting or charitable donations? Then schedule a consultation today with one of our CFP®’s at My Financial Coach. We are here to offer unbiased advice and help you plan for the years ahead. Cheers to the new year!