5/20/2022 3 min read   by: Ashley Fields

There seems to be a lot of confusion surrounding gifting. Can it help reduce my taxes or not? Trust me, I understand the need to implement every tax strategy  possible to minimize your taxes. After all, Uncle Sam seems to want their cut of everything we earn. 

This short article will help you understand the tax rules and your next steps, if any, if you (or spouse) are choosing to gift. SPOILER: GIFTING IS NOT TAX-DEUCTIBLE, unless...... 

What is a gift?

Any money given  to an individual or spouse that is not expected to be repaid is a gift. 

Who can you gift?

You can gift money to  your spouse,children,step-children, mother,father, close friend, colleague, and even a stranger up to $16,000.

Are my gifts tax deductible on my tax return?

No. Gifting up to $16,000 is not a taxable event and will not reduce your tax liability. Filing a tax return is not required unless you gift over $16,000 or if you gift to a qualified charitable organization. These are the only two scenarios when you are required to file a tax return. There are exceptions and different tax treatments for each event. 

What are the exceptions?

Exception 1. You claim monies given to a qualified charitable organization to help reduce your taxable income that will help you save on taxes.

Tax Rule: The annual income tax deduction for contributions  to public charities is 60% of your adjusted income.

For example, if your AGI is $100,000, you can contribute up to $60,000. * In this example, this tax payer decided to give $60,000 from her gross income of $100,000. This will surely be a big tax benefit due to the  itemized deduction exceeding their standard deduction. ( the taxpayer in this scenario is a single filer)

*Beware of your standard deduction. If your itemized deductions, which include  charitable contributions, don't exceed your standard deduction, you may be limited to just the allowable contribution credit of $300. 

Exception 2 You are required to file a gift tax return if you give more than $16,000 to any person. The difference will be deducted from your lifetime gift tax limit  of $12.06 million. In short, you will only pay gift taxes if you exceed  the $12.06 million limit. If this is the case, the gift tax may be 19% to 40% depending on your specific tax scenario. 

Conclusion from the Accountant

You are not required to file a tax return when gifting unless you contribute to a qualified charitable organization or if you gift more than the gifting limit of $16,000. Although gifting is a generous gesture and a possible tax deduction, you may need to consult with an accountant when gifting large amounts and to ensure you are gifting based on your adjusted gross income. All families should be mindful of their lifetime annual limit when gifting cash, property and other assets to their heirs. Gifting can be costly and you need a specialized tax planning strategy.