Gifts & Tax Considerations
What can I do to help?
To say that this has been an unusual year would be a genuine understatement. Everyone has been affected by the COVID-19 pandemic in one way or another. And many have been hurt specifically financially. During this particularly challenging time locally and globally, there have been more questions than ever before on the how-tos and options for helping others. The generosity of our community is truly amazing. This article looks at some tax strategies and laws around gifting, for your consideration and planning.
Often the best route for helping, from a tax perspective, is to donate money or items to qualified charities, which results in a tax deduction for the donor. This spring, in reaction to the pandemic, when Congress put together the CARES Act it increased the amount of total contributions that may be deductible on your 2020 tax return. Remember to save your gift acknowledgements for both cash and checks, and for household items and clothing. Receipts and gift acknowledgements need to include the phrase “no goods or services received” or similar language. We have been hearing of charitable deductions being disallowed in audits at the state level for not having this verbiage.
We have also heard from clients asking about helping a family member or friend. Their main question typically is: “Does it matter that my donation went to an individual instead of an organization?” In the time of popular community GoFundMe campaigns and struggling friends or family members, it does matter, more than ever.
The IRS recognizes gifts to individuals as a transfer of property and that puts these gifts under the domain of “transfer taxes.” This is a separate application of the tax law that is focused on the transfer of assets as a gift or inheritance through an estate. This is important because these personal one-to-one gifts, like GoFundMe donations or to a family member, are not deductible like donations to qualifying 501(c)(3) tax-exempt charities on your Form 1040.
In simple terms, donations need to be to recognized charities to receive a tax deduction. Gifts are given to individuals and the following paragraphs will discuss some of the rules around gifting.
The Basics of Transfer Taxes
You are probably wondering why this has not come up before, as certainly you have given (and received) gifts every year. There are only some gifts that the IRS is concerned about. We must report gifts that total over $15,000 per person per year. This amount is the current annual exclusion, or in other words the IRS does not care to know about amounts less than the $15,000 total to any one person. Taxpayers can give up to $15,000 or the exclusion amount for that year to any number of individuals; there are no limits on how many people you give to. This means you can give up to $15,000 to every person you know and have no tax consequences or reporting requirements. Married taxpayers can combine forces and double the amount they gift to an individual before hitting the exclusion amount.
Gifting Over Exclusion Limit?
If during the pandemic, or for any other reason, gifts are made to one person that total over $15,000 for the year, a tax return Form 709 must be filed to report the total gift amount to that person. The gifts can be cash, checks, stocks, cars and/or any other property. Generally, we are most concerned here with the total fair market value of the transfers but note items with built-in gains do transfer to the recipient.
It is unlikely that even if you are required to file the Gift Tax Return that you will have to pay any gift tax. The joining of the gift and estate taxes allows for each taxpayer to shelter from transfer taxes about $11.58 million, the current lifetime exclusion amount, either during one’s life as gifts or upon death as estate transfers. Gifts over the annual exclusion amount would use up a portion of this $11.58 million exemption amount. Often with these high exemption amounts we have plenty of room to cover both gifts during life and any after-death transfers.
Tax Strategies for Gifting
As discussed above you can always give to qualified charities and be rewarded with a tax deduction or if you are giving to an individual, gift the exclusion amount or less to avoid Form 709 filing requirements and to prevent using up any of your lifetime exclusion.
Another option would be to pay directly to certain organizations on behalf of individuals. There are two types of gifts that do not count toward the annual exclusion amount or to the overall exemption amounts. The first are any medical expenses paid on behalf of a person when the bills are paid directly to the provider. The second are amounts paid directly to a qualified higher education institution to cover tuition and other college expenses.
There are many ways to help your loved ones and community in hard times. This article gives an overview of how certain gift activities can impact your tax situation. JCCS is here to help guide you through donation and gifting options that will have the most impact for your specific situation and the cause you seek to help.
* This article is not a complete listing of all the details related to this tax topic and you should contact your CPA for a more detailed discussion regarding these items and how they may apply to your specific situation.
PHOTO: Joanna Kosinska, unsplash.com