With the holiday season in full swing, it’s helpful to review how we can make financial gifts to family, friends and charities – and the possible tax advantages and consequences.
Gifts to Individuals
Under the annual “gift tax exclusion,” you can make gifts in tax year 2022 of up to $16,000 to as many individual people as you want, with no federal gift tax consequences. Gifts can be made to friends as well as children, grandchildren, their spouses, etc. Your spouse can also make their own gifts of up to $16,000 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, see below.
For Federal tax purposes, a gift is not considered to be income. So, 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. Any checks you write as gifts need to clear your bank by the end of the applicable tax year.
Other Options for Individual Giving
As alternatives to straight cash gifts, 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. But these need to be direct payments 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.
Or, you can set up or contribute to a 529 college savings plan, even if she 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. The money in a 529 plan can also be used for grades K-12 tuition, up to $10,000 a year per student.
Charitable Giving
Contributions to charity can be taken as deductions for taxpayers who itemize their deductions. But for most of us, the Standard Deduction (which was substantially increased several years ago) makes more sense than itemizing.
So, for the most part, charitable deductions no longer 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 2022, the Standard Deduction is $12,950 for single taxpayers and $25,900 for married couples filing jointly.
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.
The tragic outcomes of recent disasters like floods or hurricanes inspire many of us to want to open our pocketbooks to help. But scammers also lie in wait for opportunities when people’s generosity may outweigh their caution. It’s always a good idea to verify a charity’s tax-exempt status at the IRS Tax Exempt Organization Search page before donating.
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].
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
