Gifting money to family members 101

As people achieve financial independence, they often think about gifting money to family members. They typically want to do it in a way that is most beneficial to themselves and the recipients.

People give financial gifts for many reasons. They may use it to pass along their values to loved ones. They might pay tuition, give the down payment on a home, help someone get back on their feet.

Whatever the reason, people want to maximize their gifts, minimize their taxes, and optimize their timing. They also sometimes have concerns about how the money will affect the recipients and about fairness between recipients.

Let’s look at some common questions around large monetary gifts, starting with the tax implications.

What monetary gifts are taxable?

Generally, a gift is any money, assets, or property given to a person without getting something in return. This gift can be direct, like writing a check, or indirect, like paying a bill or giving money through a trust.

Things like forgiving a debt, making an interest-free loan, or transferring the benefits of an insurance policy might also be considered a gift by the IRS.

Money given to a spouse who is a U.S. citizen does not count as a gift.

Gifts to others over a certain dollar amount per year could be subject to gift tax. That amount, called the annual gift tax exclusion, changes each year. There is one exception: gifts made directly for medical or educational expenses are tax-free gifts.

How much can you gift in 2022 to avoid a gift tax?

The annual exclusion amount in 2022 is $16,000 per recipient for gifts made by an individual. Married couples can double their exclusion if they “split” their gifts, assuming they both agree to the gift and file the appropriate tax forms.

Say you and your spouse want to gift money for a down payment on a home loan to your daughter and her spouse. You each can give her $16,000 this calendar year, and you can also each give her spouse $16,000. That’s a total gift of $64,000 before you owe any gift tax.

The same holds true for property. If you want to give your son a car worth $30,000, you can do that without being subject to a gift tax if both spouses agree to the gift split.

What is the lifetime gift tax exemption?

If you give more than the annual exclusion amount to someone, you may still be able to avoid paying gift tax. This is valuable since the federal gift tax rate can be anywhere from 18% to 40%, depending on the size of the gift.

Every U.S. citizen can give away up to a certain amount of money either while living, or at their death, without paying gift or estate tax. This is called the lifetime gift, estate and GST estate tax exemption.

The lifetime exemption amount is $12.06 million per person as of 2022. This means you can give up to $12.06 million in gifts over the course of your lifetime or at death (double that for couples) without paying a gift tax. Gifts under the annual exclusion amount do not count toward this lifetime total.

The current estate and gift tax exemption law sunsets in 2025. Unless a new law is passed, the lifetime exemption amount will drop on Jan. 1, 2025, likely to about $6.2 million. People who have gifted money over that cap between 2018 (when the current law took effect) and 2025 will not be retroactively charged.

So, if you are planning a large amount of gifting soon, consider doing so before the laws change. Additionally, if you have a taxable estate worth over $6 million (or $12 million for a couple), you will want to carefully plan how and when you disperse your estate.

How do I report gifts to the IRS?

Like estate taxes on an inheritance, the person making the gift is usually the party responsible for paying the gift tax. For gifts that fall outside the annual exclusion or education/medical exemption, you must file IRS Form 709, even if you plan to use part of your lifetime exemption amount to avoid gift taxes. You wouldn’t pay a gift tax until the amount reported on your 709s over time exceed the lifetime exemption.

If you and your spouse each made gifts that qualify, you would file separate 709 forms even if you file taxes jointly. Additionally, if you and your spouse are splitting gifts of money or property, you must file a gift tax return even if it is under the annual exclusion.

Gift recipients generally are not required to report the gift.

In addition to federal gift taxes, some states may also impose gift tax. Check with a tax preparer to determine the gifting implications in your state.

How do I give money to a family member?

For tax purposes, there may be better options than giving cash, such as paying certain expenses directly, setting up accounts for specific uses or gifting stocks and bonds.

As mentioned earlier, there is no limit on payments made directly to medical or educational institutions for health care expenses or tuition for others. So, if you want to gift money to a college student, you could pay the tuition bill for them and incur no tax on that gift.

Student loan payments do not fall within the educational exception. However, payments made by a loan co-signer are not subject to the gift tax. They are considered repayment of debt, not a gift.

Another way to pay for education is through a 529 plan that you contribute to over time. Both your contributions and any growth in the account remain tax-free if the money is eventually used to pay for college tuition.

There’s a good chance you are giving a gift to someone in a lower tax bracket. If so, consider gifting them securities instead of cash. They can sell off those stocks or bonds and use part of the resulting cash to pay the capital gains tax (at a potentially lower rate than you would have) and keep the rest of the cash as the gift. Alternatively, you might encourage them to keep the funds invested for the long-term.

Many people use gifting to encourage long-term savings and investing. For example, a common practice is to “match” someone’s retirement account contribution. If they are eligible for an IRA or Roth IRA, you might consider matching dollar for dollar what they put into their retirement account, up to the maximum allowed. For example, if they add in $1,000, you can match their contribution by $1,000.

What else should I consider when gifting money to family?

When it comes to gifting to multiple children or grandchildren, consider whether you want each to get the same gifts, gifts of equal value, or the gifts that they will most need or appreciate. Don’t overlook life insurance as an estate planning tool. It can be a great equalizer when it comes to gifting illiquid assets like a business or property.

Consider whether they should get the gifts now or in the future. For future gifts, weigh the pros and cons of a will versus a trust.

You might also consider the frequency of the gifts. Is this a one-time gift, or do you intend to make it an ongoing gift? If ongoing, do you want the recipient to know they can count on this gift, or do you prefer the flexibility of setting expectations that you can change it at any time?

Also think about why you are giving the gift and how you would feel if it were used in a way you didn’t intend. Would you prefer to give open-ended gifts like cash or more directed gifts for a specific purpose? For example, if the gift is specifically for a home down payment, you might feel more comfortable writing a check directly to the mortgage company.

How do I make gifting decisions?

Talk with your financial advisor about incorporating gifting money to family into your holistic financial plan and estate plans. You will want to balance gifting with charitable giving and your own expense needs over your lifetime. An advisor will also help you continually reevaluate as your needs, the markets, and tax laws change.

If you don’t have a financial advisor, contact us to see how we can help you.