We are often asked about the tax rules around gift-giving, especially as the end of the year approaches. These tax rules are governed by the federal gift and estate tax system, which is wholly separate from the income tax system. There is no Massachusetts gift tax.
If you give a gift, the money you give is not income taxable to the recipient, nor is the gift tax-deductible by you (the person who makes the gift, who we’ll call the “donor”), unless it is made to a qualified charity.
Federal gift tax, if any, is paid by the donor, not by the recipient. For federal gift and estate tax purposes, under current law every US citizen has a combined $11.4 million exemption (in 2019) from gift and estate tax. This means that each person can give up to $11.4 million to others, either during their lifetime or at death, without paying any federal gift or estate tax. A gift tax is payable only after the donor has made combined lifetime and death time gifts of more than $11.4 million.
In addition, certain gifts are exempt from the gift tax. Exempt gifts include:
- so-called annual exclusion gifts which currently allow a person to gift $15,000 (in 2019) to any number of people in any calendar year,
- unlimited gifts to a spouse (provided the spouse is a U.S. citizen),
- unlimited gifts to qualified charities, and
- unlimited payments of health care expenses or tuition for another as long as those gifts are paid directly to the educational institution or health care provider.
These exempt gifts do not require the donor to file a federal gift tax return. If a donor makes a non-exempt gift, a federal gift tax return must be filed, even if no gift tax is payable, to track how much of the donor’s gift and estate tax exemption has been used.
The gift tax is complicated, but for most people who want to make gifts to children or grandchildren, the gift tax will not be an issue. If you wish to make a non-exempt gift, it is best to consult with your estate planning attorney and accountant before making the gift so that issues such as timing, and estate, gift and capital gain tax implications can be thoughtfully considered prior to making the gift.