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Imagine your child is getting married and you want to help pay for the wedding. You have been saving for years and have now set aside €30,000 for their big day, which you want to present in the form of a cheque.
Before passing on that much cash, however, it’s important to understand the potential tax implications of making a $30,000 donation. For a gift of this size, you may have to pay federal gift tax, which can be as high as 40%. The good news is that you may not have to pay gift taxes at all, but you do need to be aware of reporting requirements and other restrictions. Consult a financial advisor to minimize your gift tax liabilities.
The federal gift tax applies when you transfer money or property to someone else without getting anything of equal value in return. Gift tax rates range from 18% to 40%, depending on the size of the gift.
However, not all gifts trigger this federal tax. The IRS allows you to give away up to $17,000 ($34,000 for married couples) per year to each individual without having to pay taxes on the gift. This is called the annual exclusion and by 2024 it will increase to $18,000 per person.
However, gifts that exceed this annual exclusion are not necessarily taxed either. Instead, they reduce the amount of money or property you can give away tax-free over the course of your life. This lifetime limit is known as the basic exclusion amount or lifetime exemption and is adjusted each year for inflation.
The gift tax only applies if you have exhausted your lifetime exemption. In 2023, a person can give away up to $12.92 million over their lifetime without being charged gift taxes (this will rise to $13.61 million in 2024). For example, if someone gives away $13 million, he will pay gift tax on only $80,000. And if you need extra help planning major gifts, consider hiring a financial advisor.
The federal gift tax only applies to very wealthy people who give away millions of dollars in assets or property over the course of their lives.
If you want to give a child $30,000 to help pay for a wedding, there are a few different ways this can be structured.
As a gift solely from you to your child, a $30,000 wedding gift by itself would avoid most tax liability. The gift only exceeds the $17,000 annual exclusion for 2023 by $13,000, so that’s all that could potentially be taxable if you’re single.
If this is your first time exceeding the annual exclusion, there’s more good news. In that case, the $13,000 deductible would simply reduce your $12.92 million lifetime exclusion by that amount. You don’t actually have to pay any gift tax unless you exceed your remaining lifetime exclusion, although you still have to fill out Form 709.
Alternatively, you can gift both your child and his/her future spouse $15,000 each and avoid the annual exclusion threshold (remember, you can only gift up to the annual exclusion amount per year). per person).
To ensure you are structuring your donations in your best interests, discuss this with a financial advisor.
But what if you are quite rich and have already exceeded your life limit? If it looks like you’ll have to pay taxes on your $30,000 wedding gift, there are a few more ways you might be able to avoid them:
Gift division with spouse: If you are married, you and your spouse can agree on your tax return to divide the donation. This would allow you to each earn $17,000 in donations (in 2023) without exceeding the annual exclusion. In this way you can give your child up to € 34,000 tax-free.
A couple examines the tax implications of a $30,000 gift for their daughter’s wedding.
While there are a number of ways you can legally avoid paying the gift tax, there are still requirements and risks to consider. Some of these include:
Good reporting: Gift amounts over $17,000 must be reported to the IRS on Form 709 to track lifetime exclusion. Failure to file Form 709 may result in fines.
Mutual consent: Gift splitting requires both spouses to agree and file Form 709. Failure to demonstrate mutual consent can also result in IRS penalties. Additional considerations may come into play when splitting gifts if you live in one of the nine community property states.
By 2026, lifetime limits will decrease. The Tax Cuts and Jobs Act (TCJA) doubled the lifetime exemption limit on gift and estate taxes for individual filers in 2018. But starting in 2016, that generous ceiling will return to pre-2018 levels (adjusted for inflation). Keep in mind that a financial advisor can help you navigate and interpret changes in tax law.
Most people can avoid paying federal gift taxes if they contribute $30,000 to a child’s wedding. This is due to the generous lifetime gift exclusion amounts. However, you must still correctly report donations above the annual exclusion amount on your tax return. For 2023, this amount is $17,000. In 2024, the exclusion amount will increase to $18,000. For taxpayers whose gifts may exceed the lifetime tax-free exclusion amount of $12.92 million, gift splitting and other strategies can provide a way to finance a wedding without having to pay taxes.
If you are considering making a large financial gift, contact a financial advisor to see how it may impact your taxes and estate planning. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
As tax season approaches, SmartAsset’s federal income tax calculator can tell you how much you may owe in federal, state, and local income taxes the next time you file a return.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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