Financial gifts are gifts of money to family, friends, or charity. With the giving season approaching, let’s debunk a few common myths about gifting money.
Most taxpayers don’t ever need to worry about gift taxes because most financial gifts (including money) are not subject to a gift tax. However, sometimes questions do pop up about paying taxes or claiming deductions on gifts that are given or received.
Myth 1: If my parents give me a cash gift, I have to report it as income on my tax return.
As the recipient of the cash, you do not have to report the gift as income. Parents can give each child (and anyone else, for that matter) up to $14,000 a year without reporting that cash gift to the IRS and without paying any taxes on it. An exception to this is if the recipient gets stocks or a capital asset (house, land, art) which has appreciated in value since the giver originally purchased it. In that case, when the recipient sells the stock or asset, she will be required to pay capital gains tax (15%) on the increased value of the gift.
Myth 2: Anyone who gifts more than $10,000 a year has to pay a gift tax.
The current gift tax is imposed on the giver, but only for gifts totalling more than $14,000 per person. In fact, a married mom and dad can split a cash gift to a child, meaning each parent can give their child $14,000 each year ($28,000/year total) without any worry of having to pay a gift tax. All gifts over $14,000 per person per year must be reported on IRS Form 709 by the giver, not the recipient.
Myth 3: I can avoid the gift tax by giving a 0% interest loan.
No. The IRS requires anyone who loans money to treat it “like a loan”. That means the loan must include a written contract with a payment schedule and the loaner must charge a “fair market interest rate”. A zero percent interest rate is not acceptable. However, let’s say a parent loans an adult child $10,000 at 3% interest, writes up the promissory note with a payment schedule, has everyone sign off on the loan agreement and then the parents forgive the loan…then the parents can treat the loan, or the balance that remains on it as a gift.
Myth 4: Only the federal government imposes a gift tax.
As of 2016, the states of Connecticut and Minnesota both impose a gift tax. North Carolina repealed their state gift tax in 2009 and Tennessee repealed one in 2012.
Myth 5: All my charitable gifts are tax-deductible.
When I was young and first starting filing federal tax returns, I thought every single hard-earned dollar I gave to charity would help lower my taxes. I was wrong. First of all, not all gifts qualify, so check the IRS rules for what types of organizations and gifts count. (Or ask us!) Second, you have to itemize deductions to count charitable gifts. If you don’t itemize, your charitable gifts are not used for tax reduction. Third, if you don’t have a written record for any charitable gift of $250 or more, forget about it – you’re opening yourself up to audit risk if you claim a deduction you can’t substantiate.
Even if you meet all those rules and qualify, your charitable deductions are limited to either 30% or 50% of your adjusted gross income, depending on their nature.
So, be generous for the sake of being generous and helping your community, not necessarily for the tax break!
What has been your experience with gifting to family, friends or charity? DO you have questions about it? Let us know.