Gifts to Individuals
Under the annual “gift tax exclusion,” you can make gifts in tax year 2023 of up to $17,000 to as many individuals as you want, with no federal gift tax consequences and no requirement to report them to the IRS. Gifts can be made to friends as well as children, grandchildren and their spouses. Your spouse can also make their own gifts of up to $17,000 to individuals, and there is no limitation at all on gifts between spouses.
The gifts you make do not impact your federal income tax, and you cannot take any deduction for the value of the gift, other than gifts that are deductible charitable contributions as described below.
For Federal tax purposes, a gift is not considered to be income. As a result, the individuals receiving gifts of money or anything else of value from you do not need to report the gifts on their tax returns. An exception is a gift that may appreciate in value, such as stocks. The person receiving the gift may have to pay capital gains tax upon disposition if the gift is sold. Keep in mind that any checks you write for gifts need to clear your bank by the end of the applicable tax year.
Other Options for Individual Giving
As an alternative to cash gifts to individuals, you can make unlimited direct payments for medical and tuition expenses for as many individuals as you want, with no gift or estate tax consequences. These payments need to be made directly to the institutions. For example, you can’t give your granddaughter the money to pay her college tuition; it has to go directly to the school.
You can also set up or contribute to a 529 college savings plan, even if the child is already in college. What you contribute grows, tax-free, and comes out also tax free if used for educational purposes including books, supplies and even a computer. There is no limit to 529 plan withdrawals if they are used for qualified educational expenses. However, if the withdrawals are for private school expenses for K-12 children, the withdrawal is limited to $10,000 per year.
Charitable Giving
Contributions to charity can be taken as deductions for taxpayers who itemize their deductions. For most of us, however, the Standard Deduction (which was substantially increased several years ago) makes more sense than itemizing.
Charitable deductions no longer will lower your tax bill, unless your possible deductions for charity combined with other deductions like mortgage interest, real estate taxes and medical expenses total more than the Standard Deduction. For tax tear 2023, the Standard Deduction is $13,850 for single taxpayers and $27,700 for married couples filing jointly.
If you do plan on making tax-deductible charitable contributions, you can verify a charity’s tax-exempt status at the IRS Tax Exempt Organization Search page before donating.
Some taxpayers can maximize the impact of their charitable contributions by giving away the gain on appreciated securities instead of cash. Since charities are exempt from capital gains taxes, the gain is never taxed, but you get to deduct the full market value of your stock at the time of the gift.
If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
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