Generosity might come back to bite you at tax time because of the federal gift tax. Most people will never pay the gift tax that the federal government imposes because you must give away millions before you actually pay out of pocket. Each year, you can give away up to the annual exclusion to each recipient before you even start using your lifetime exemption.
What is the Maximum Gift?
Each year you can give any person a certain amount of money without having to pay gift taxes, known as the annual exclusion. The amount of the annual exclusion adjusts for inflation, and as of 2013, it sits at $14,000. That means that you can give any number of people up to $14,000 each and not worry about filing a tax return for these gifts. For example, if you give five friends $14,000 each, you wouldn’t have to file a gift tax return. But, if you gave just one friend $15,000, you would need to file a gift tax return because you made a $1,000 taxable gift.
Even when you give more than the annual exclusion to a person in any given year, there is a likelihood you may not have to pay taxes. The IRS also gives every person a lifetime exclusion for taxable gifts. As of 2013, you’re allowed to give $5.25 million over your lifetime without actually having to pay any gift taxes.
Unlimited Gifts for Certain Purposes
Depending on the purpose of your gifts, you might be able to give as much as you want without any gift tax implications. First, you can give as much as you want to a political organization. Second, you can pay tuition at higher education institutions, like colleges and universities, in any amount for anyone as long as you pay the tuition directly to the school. If you pay it to the student and then the student uses it to pay tuition, this exception doesn’t apply. Finally, you can pay medical bills of any amount for anyone as long as you pay the bill directly to the hospital.
Exceptions to Gift Taxes
You’re allowed to give an unlimited amount to your spouse each year without having to worry about gift taxes. In addition, gifts to charitable organizations don’t get hit with the gift tax, either. However, the charity must be a qualified organization, otherwise the exception doesn’t apply. Individuals never qualify for the charity exception, no matter how needy. For example, even though your friend might be facing foreclosure, you can’t give him money to keep his home without it counting as a gift.
Consequences for Not Paying Taxes on Gifts
Just like other federal taxes, if you do make taxable gifts and don’t pay the taxes on them, you could end up with an IRS tax lien on your credit report, which would hurt your credit score. Tax liens are particularly long lasting; unpaid tax liens remain on your Experian credit report for 10 years. That means the sooner you pay it off, the sooner your credit score can start recovering.
About the Author
Mark Kennan is a freelance writer specializing in finance-related topics. He has worked as a sports editor and published articles on a number of online outlets.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All rights reserved.