You Could Be Charged Taxes for Giving Money to Family Members

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Graduations, birthdays, house warmings, birth of a new baby, are all occasions where you may want to shower your family with nice gifts or cash. But what you may not have known is giving large sums of money or expensive gifts to your family and not reporting it to the IRS could land you in jail.

There is something the IRS likes to call the gift tax. The gift tax is a tax on the transfer of property or money by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether or not the you intend the transfer to be a gift. So loaning your family money and the not paying you back, is technically a gift and would apply under this rule.

Before you start giving large gifts to your family, read these important tips about tax penalties:

Who pays the gift tax?

The person giving the gift is generally responsible for paying the gift tax. Under special arrangements the person receiving the gift may agree to pay the tax instead. If you are considering this type of agreement, seek out a tax professional.

Rules governing gift taxes.

If you gave gifts worth or in actual dollars over a certain amount to one family member within a year, you must disclose it under the gift tax. Notice I mention to one family member. This means, that you can give multiple gifts to different people and it not be counted as one gift.

The Annual Rule.

This regulation refers to the yearly sum amount and must be followed every year. If your gift amount is worth or is more than the exempted amount below (in sum for one person and for the year in which you’re filing your taxes) you will have to report the gift on your tax return. However, if the amount is less, you do not have to report it.

Gift Tax Annual Exclusion-

Years 2002 – 2005: $11,000

Years 2006 – 2008: $12,000

Years 2009 – 2012: $13,000

Years 2013 – 2017: $14,000

Years 2018– 2021: $15,000

Year 2022: $16,000

When do I need to file a gift tax return?

Generally, a gift tax return must be filed if any of the following apply.

  • Gifts were given to at least one person that are more than the annual exclusion for the year.

  • If you and/or your spouse split a gift.

  • You gave someone a gift of a future interest that they can't actually possess, enjoy, or receive income from until some time in the future.

Exceptions to the Gift Tax.

Now there are always exceptions to the rule.

  • Paying school tuition for a family member does not qualify as a gift.

  • Medical bills are not considered a gift as well.

  • Gifts to certain exempt organizations described in 501(c)(4), 501(c)(5), and 501(c) (6).

  • Gifts to charities.

  • Giving to political organizations

  • There are also some exceptions to the rule for husband and wives. If the couple are both citizens, they can give each other any amount they choose without incurring any tax consequences. The tax penalty applies if one of the partners is not a citizen.

Gave a gift of over the annual exemption in one year?

If you’ve given a gift worth or over the annual exemption, you would need to find an IRS Form 709.

Final Thoughts

The amount of money you can donate as a gift may be reduced due to tax penalties. Before giving out gifts, think about the tax ramifications. Speaking with a tax specialist can assist you in structuring your gifts to avoid these penalties.