Lets assume you have or make enough money that you can afford to give it away.
Talk about a good problem to have, right? In any case, what are the tax implications of that gift? Your tax benefits or consequences depend on who receives your gift, how much it is, and when its given.
Heres a simple way to think about it: If you want to reduce your tax burden this year, give that money to a qualifying charity. If the goal is reducing the size of your estate – and, thus, the amount that can be taxed after you die – consider giving money to family members or any individual who can use your help now.
Mom and Dad, Can You Spare $5.49 Million?
Americans are living longer, so planned gift-giving is increasingly popular. If you have a sizeable estate, i.e. more money than youll need for the rest of your life, why wait to pass on wealth if your children will be seniors by the time they receive it?
In 2017, any individual can give up to $14,000 to a family member (or any individual) without incurring any gift taxes, or even having to report the gift. In fact, a married couple can split their gifts in any calendar year, which doubles the gifting limit to $28,000. (This does require both to file IRS Form 709, however.)
Thats definitely a generous gift but what if Mom and/or Dad wants to gift an amount in excess of those annual limits, to help with a down payment on a house, for instance? Any amount in excess of the $14,000/$28,000 is considered taxable, but that doesnt mean that you, as the parent(s), or your child will actually owe any gift tax. It just means the giver must file Form 709.
Why? The IRS tracks those gifts against the lifetime exclusion – the amount someone can gift over a lifetime without incurring gift taxes. For 2017, the figure is $5.49 million.
Just in case thats a problem for anyone, keep in mind that gifts made for education tuition or medical expenses are exempt from any gift taxes.
Give It Away and Get Some Back
While you may never have to worry about paying gift taxes, you do pay income taxes, or at least file a return. You most likely also have causes and organizations you care about, in addition to individuals.
The IRS and most states rewards that generosity by making gifts to qualifying charities tax deductible. Combined with other itemized deductions filed on Form 1040A, like mortgage interest or property taxes paid, these gifts not only help the charities but also may reduce your tax bill or increase the size of your refund.
Generally, every dollar given to a qualified charitable organization will reduce your adjusted gross income (AGI) – the amount of income the IRS and your state considers taxable – by the same amount.
Heres where some people get confused: That doesnt mean a $2,000 gift will cut your taxes by $2,000. That gift simply reduces your AGI by $2,000.
So what is the end result in actual tax savings? Without considering all the nuances of which tax bracket youre in, or whether the gift is cash versus other types of property, generally speaking you will save 25 cents for each dollar you give to charity. (For more specific figures, check out this giving calculator.)
Its Not About the Money
It almost feels awkward to discuss the financial benefits of giving. Few people give money away solely to get something monetary in return. Many of us do it to help people or causes we believe in. But as long as the IRS rewards or penalizes the gift, it pays to know the impact on your own bottom line. Give freely and wisely!