5 Common Tax Myths About Gifts
January 04, 2019Did you receive or give any large monetary gifts to family or friends this holiday season? We often get questions about the tax implications of gift-giving this time of year, so let’s take a look at some of the most common tax myths about gifts:
Myth: You have to pay tax on gifts you receive
Reality: You don’t owe tax on gifts that you receive. Instead, the giver of the gift may owe tax. This may seem counter-intuitive but the whole point of the gift tax is to prevent people from using lifetime gifts to avoid paying the estate tax.
Possible caveats
There are a few caveats to this though. The first is that gifts from your employer or in appreciation of your work may be taxable as income. That’s why tips are technically taxable even though they’re usually a voluntary gift rather than a required payment for service. (Don’t worry. Small de minimus gifts like a holiday turkey from your employer are excluded from tax.)
Second, if you’re given property that appreciated in value since the giver purchased it, you get the giver’s cost basis. That means that if you later sell it, you’ll have to pay a tax on the difference between what you sell it for and what the giver purchased it for. It’s kind of like a delayed tax on part of the gift’s value.
For example: Your grandfather gives you 50 shares of stock worth $20/share, and he paid $1/share for it long ago. You’ll be responsible for the capital gains tax on the $19/share gain when you sell the stock.
The final caveat is that if you’re fortunate enough to receive over $100k in gifts from one or more related foreign individuals or trusts or more than $16,076 from a foreign corporation or partnership, then you’ll have to file Form 3520 with the IRS. That’s not because foreign gifts are taxable. The IRS just wants to make sure that you’re not claiming what would otherwise be taxable foreign income as a nontaxable gift.
Myth: You have to pay a tax on gifts you make that are over $14k per year
Reality: First, the annual gift tax exclusion is now $15k per year. There are several other things to keep in mind too. One is that you can give an unlimited amount to a qualified charity or to your spouse without owing tax (unless your spouse is a non-citizen, in which case the annual exclusion is $152k in 2018 and $155k in 2019). You can also give an unlimited amount if you send a gift directly to a medical or educational institution. That’s one reason (I’m sure you can think of more) that it may make more sense to write a check directly to junior’s college rather than writing him a check for that purpose.
The $15k is also per person, so you can theoretically give $15k gifts to a virtually unlimited number of people each year tax-free. (If this is your intention, don’t forget the person you heard this from.) You and your spouse can also combine your $15k exemptions to give a $30k tax-free gift.
Finally, even if you go over the exclusion limit, you still probably won’t owe anything to the IRS, at least not yet. That’s because the amount you go over the limit just reduces the $11.18 million (going up to $11.4 million in 2019) that you can give tax-free over your entire life or at death. Even if you don’t owe anything right now, you still have to file a gift tax return for going over the limit though.
Myth: You can avoid the gift tax by loaning money at no interest and than forgiving the loan
Reality: To be considered a loan, you have to treat it like a real loan. That means putting the terms in writing, including the repayment schedule, and charging a fair market interest rate. If you forgive the loan, it will be considered a gift at that point. If you want to stay under the $15,000 annual limit, you can forgive the 1st $15,000 of payments each year.
Myth: Charitable contributions can always be deducted from your taxable income
Reality: First, the gift must be to a qualified tax-exempt charitable organization. You can ask the charity if they qualify or search for the charity on this IRS site. If you receive something of value for your gift, you can only deduct the difference between what you gave and what you got in return. Finally, the charitable deduction has to be itemized. That means if your total itemized deductions (which includes your mortgage deductions) are less than your standard deduction, the charitable donation won’t reduce your taxes. (more on that here)
Myth: This is all you need to worry about
Reality: Certain states have their own gift taxes and other states may treat charitable deductions differently, so you may need to file in your state even if you don’t have federal tax implications for your gift. Be sure to check what your own state’s laws are.