How much can I give my son and daughter-in-law without IRS tax problems?

How much money can I give to my son and daughter-in-law without having a tax problem with the IRS?

– Irwin

For 2023, you can give your son and daughter-in-law $17,000 each without dealing with the IRS. But even if you give more, you won’t have to pay taxes right now. In fact, unless you exceed the lifetime limit, currently around $12 million, you won’t have to pay any gift taxes.

An experienced financial advisor can help you navigate these rules so you can continue to give gifts to the people you love without worrying about gift taxes.

What is gift tax?

Gift tax is a federal tax that can be imposed when you give someone property or money and do not give you something of equal value in return. The IRS sets limits on how much you can give to other people each year and over your lifetime. If you give more, you could end up owing taxes, but not until you exceed the lifetime limit.

Gift tax rates are high, starting at 18% and going up to 40%. The person giving the gift pays the tax. (A financial advisor can help you navigate the tax consequences of your gifting strategy.)

Gift limits and lifetime exemptions

The annual gift limit usually changes every year. For 2023, the limit is $17,000. That means you can give anyone up to $17,000 without having to deal with gift tax.

There is no limit to how many people can receive your gift. So you could distribute $17,000 to up to 10 people and not trigger annual gift tax issues. You can also gift the same person up to the limit each year without tax implications.

If any gift exceeds the annual limit, you will file a gift tax return on IRS Form 709. This is an informational return only, with no tax due until you exceed the lifetime limit of $12,092,000 (for 2023). Only the excess portion of the gift begins to reduce that lifetime exemption. For example, if you gave your niece $20,000 in 2023, you would file a gift tax return and deduct $3,000 of the lifetime exemption from that.

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What counts as a gift?

Anytime you give someone money or property and they don’t return something of equal (or nearly equal) value, that counts as a gift. For example, if you give your sister an old car when you get a new one, it is a gift. Other examples include contributing $20,000 to your grandchild’s 529 plan or treating your best friend to an all-expenses-paid vacation.

The IRS may also consider interest-free loans or loans that are not repaid as gifts. Another tricky situation: joint bank accounts with non-spouses. If you have a joint bank account with your adult child, romantic partner or sibling, large withdrawals could trigger the need to file a gift tax return.

The story continues

Some types of gifts are tax-free and never count toward the lifetime limit. These include:

• Charitable donations

• Political contributions

• Gifts for husbands

• Gifts for dependents

• Medical expenses

• Tuition fees

Medical expenses and tuition payments are considered tax-free gifts only if the payments are made directly to the school or health care provider on behalf of the recipient. (A financial advisor can help you navigate the tax consequences of your gifting strategy.)

Special gift tax strategies

If you may be facing the lifetime limit, there are moves you can make to reduce your chances of owing gift taxes.

If you are married, you can use a gift-sharing strategy. Here, you and your spouse can each give the annual limit to the same person without any tax consequences. For example, in 2023, each of you could separately give $17,000 to an adult child for a total tax-free gift of $34,000, but if only one of you gave the entire amount, it would trigger Form 709.

There is also a special rule that allows donors to contribute $85,000 (in 2023) to a qualified tuition plan (QTP) and use the exclusions for up to five years to not exceed the annual gift limit. You should file Form 709 in the first year to report this election, but not in subsequent years, unless you make additional gifts to the same recipient.

For future planning, you’ll want to make larger gifts before the lifetime limits return to their much lower pre-2018 levels in 2026. Then, unless there are more rule changes, the lifetime limit will shrink back to about $5.5 million (adjusted for inflation). (A financial advisor can help you navigate tax law changes and how they may affect you.)

Conclusion

Most people will not pay tax on gifts. But you could end up having to file a gift tax return in a year you give generously to friends or family if you give more than the annual limit to any one person. For example, paying for a wedding, giving a car as a graduation gift, or taking out a large interest-free loan that isn’t repaid could trigger Form 709.

Find a financial advisor

• If you have questions specific to your gift and tax situation, a financial advisor can help. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can interview your advisor matches for free to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals , get started now.

• Understanding your tax bills can help you plan for your money. Whether you’re saving for retirement, paying off college or credit card debt, or investing your money differently, SmartAsset’s tax statement calculator can help you find out how much you’ll get back from the government so you can plan ahead.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.

Michele Cagan, CPAis SmartAsset’s financial planning columnist and answers readers’ questions about personal finance and tax topics. Have a question you’d like answered? Email [email protected] and your question may be answered in a future column.

Please note that Michele is not a participant in the SmartAsset AMP platform, nor is she an employee of SmartAsset and has been compensated for this article.

Photo credits: ©iStock.com/Everyday better to do what you love, ©iStock.com/LuckyBusiness

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