Clients often have questions about making gifts to relatives and friends. We thought it would be helpful to provide some background on what is known as the "annual gift tax exclusion." This is an IRS tax law that allows you to gift a certain amount tax free each year.
Under the annual exclusion, you can give as much as $14,000 this year to as many people as you like – without any tax considerations or burdensome paperwork. The total amount to any one person can only be $14,000.
The recipient can be anyone you choose. It doesn't matter whether you are related to your lucky beneficiaries. You can do this for your nieces, children, and grandchildren or even for total strangers. (Transfers of any amount from one spouse to the other are typically tax-free.)
The recipient doesn't owe any income tax on your generosity as long as your gift is really a gift and not an attempt to mask a payment for some goods or services. People often ask how to deduct such gifts as charitable donations on their income tax returns. The answer: don't even try it. You can't deduct any gifts for tax purposes unless they go to qualified charities or educational institutions and unless you itemize your deductions.
There is also an easy way to give away more than the annual limit under the annual gift-tax exclusion: Pay for someone else's tuition or medical expenses. Those transfers don't count toward the annual limit. Just be sure to make those payments directly to the educational or medical institution. It doesn't matter whether the recipient is a relative or a friend.
If you would like to learn more about gifting strategies, please call Kristina at 603-458-2776 or Contact Us.