The holiday season is a time of giving! With Christmas arriving next week, you might be rushing to find last minute gifts for the special people in your life. Have you considered potential tax consequences of those gifts?
The annual gift exclusion for 2020 is $15,000. This means that an individual donor may gift $15,000 to any one recipient during the year without incurring federal gift tax or using the donor’s gift and estate tax exemption. A married couple may gift $30,000 to any one recipient without incurring gift tax or using their exemptions. For example, if a donor has three children, the donor can gift up to $15,000 to each child during the year without having to file a federal gift tax return. If a donor gifts more than the annual gift exclusion amount to any one recipient during the year, the donor will have to file a federal gift tax return and use their gift and estate tax exemption or pay gift tax. The gift and estate tax exemption is the total amount that an individual can gift over the annual exclusion amounts, either during lifetime or at death, before having to pay any federal gift or estate tax. The exemption is $11,580,000 for 2020.
Payments made directly to an education or medical institution do not require the donor to use their gift and estate tax exemption or pay gift tax.
For example, Dad wants to give his daughter a Christmas gift, but wants to do so without using any of his gift and estate tax exemption. Dad gifted daughter $5,000 for her birthday in June. Dad then paid $10,000 in August directly to her college for Fall semester tuition. How much can Dad gift daughter for Christmas without using any of his gift and estate tax exemption? Dad may gift daughter $10,000 for Christmas because he used $5,000 of his annual gift exclusion for her birthday gift, but the qualified tuition payments to his daughter’s college did not count towards the $15,000 annual gift exclusion.