Ask an advisor: How much money can I give away “without getting into a tax problem with the IRS?”
How much money can I give to my son and daughter-in-law without getting into a tax problem with the IRS?
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Before 2024, you can give your son and daughter-in-law $18,000 each without having to deal with the tax authorities. But even if you give more, you don’t have to pay taxes at this time. Unless you exceed the lifetime limit, currently $13.61 million, you essentially don’t have to pay any gift taxes.
Here’s how it works. An experienced financial advisor can help you navigate these rules so you can continue giving gifts to the people you love without worrying about gift taxes.
What is gift tax?
Ask an advisor: How much money can I give away “without getting into a tax problem with the IRS?”
The gift tax is a federal tax that may be levied if you give someone property or money and he/she does not give you something of equal value in return. The IRS sets limits on how much you can give to other people each year and throughout your lifetime. If you give more, you may eventually owe taxes, but not until you exceed the lifetime limit.
Gift tax rates are steep, starting at 18% and ending at 40%. The person who gives the gift pays the tax.
Gift limits and lifetime exemptions
The annual gift limit typically changes every year. For 2024, the limit is $18,000. This means that you can donate up to € 18,000 to anyone without having to deal with gift tax.
There is no limit on the number of people who can receive your gift. So you can distribute $18,000 to 10 people and not cause any annual gift tax problems. You can also give the same person a maximum gift each year, without tax consequences.
If a donation exceeds the annual limit, you will file a gift tax return on IRS Form 709. This is purely an informational return and no tax is due until you exceed the lifetime limit of $13,610,000 (for 2024). Only the excess portion of the gift begins to reduce that lifetime exemption. For example, if you give your niece €20,000 in 2024, you will file a gift tax return and deduct €2,000 from the lifetime exemption. (A financial advisor may be able to help you navigate the tax implications of your giving strategy.)
Anytime you give someone money or property, and they don’t give something of equal (or nearly equal) value in return, it counts as a gift. For example, if you give your old car to your sister when you get a new one, it is a gift. Other examples include donating $20,000 to your grandchild’s 529 plan or treating your best friend to an all-expenses-paid vacation.
The IRS may also consider interest-free loans or loans that are not repaid as gifts. Another tricky situation: joint bank accounts with non-spouses. If you have a joint bank account with your adult child, a romantic partner, or a sibling, large withdrawals may trigger the need to file a gift tax return.
Some types of gifts are tax-free and never count toward the lifetime limit. These include:
Charitable donations
Political contributions
Gifts to spouses
Gifts to relatives
Medical costs
Tuition payments
Medical expenses and tuition payments only count as non-taxable gifts if the payments are made directly to the school or health care provider on behalf of the donor. (A financial advisor may be able to help you navigate the tax implications of your giving strategy.)
Special gift tax strategies
Ask an advisor: How much money can I give away “without getting into a tax problem with the IRS?”
If you’re likely to hit that lifetime limit, there are steps you can take to reduce your chances of ultimately owing gift taxes.
If you are married, you can use a gift-splitting strategy. Here you and your spouse can each give the annual limit to the same person, without tax consequences. For example, in 2024, you could each separately give $18,000 to an adult child for a total of $36,000 nontaxable gift, but if only one of you gave the full amount, Form 709 would be triggered.
There is also a special rule that allows donors to contribute $90,000 (in 2024) to a qualified tuition benefit plan (QTP) using five years of exclusions, not to exceed the annual gift limit. You must file Form 709 to report that election the first year, but not in subsequent years unless you make additional gifts to the same recipient.
For future planning purposes, you will want to make larger donations before the lifetime limits return to the much lower pre-2018 levels in 2026. Unless there are further rule changes, the lifetime limits will drop to approximately $7 million (adjusted for inflation). (A financial advisor may be able to help you navigate tax law changes and how they may affect you.)
In short
Most people do not pay gift tax. But in a year that you donate generously to friends or family, you may have to file a gift tax return if you donate more than the annual limit to one person. For example, if you pay for a wedding, give a car as a graduation gift, or take out a large interest-free loan that is not repaid, all of these can trigger Form 709.
Find a financial advisor
If you have questions specifically related to your donation and tax situation, a financial advisor can help you. 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 interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Understanding your tax bill can help you plan for your money. Whether you plan to save for retirement, pay off your student or credit card debt, or otherwise invest your money, SmartAsset’s tax return calculator can help you figure out how much you’ll get back from the government so you can get ahead can plan.
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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Michele Cagan, CPAis a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Michele is not a participant in the SmartAsset AMP platform, nor an employee of SmartAsset, and she received compensation for this article.
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