If you’ve given money or property to someone as a gift, you may owe federal gift tax, but in many cases, you will not. For example, there is usually no tax if you make a gift to your spouse or a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year.
In 2021, you can give any amount up to $15,000 per person per year with no gift tax liability. However, gifts exceeding that amount are counted against a gift tax exemption of $11,700,000 and are subject to the gift tax. At your death, these gifts could become your taxable estate (with credit for gift tax paid).
Education-related Gifts
Many grandparents and parents contribute to the cost of their child or grandchild attending college or boarding school. With tuition payments at most college and boarding schools due in July, they may be wondering whether the amount they are contributing to their grandchild’s education is taxable. Here are a couple of common scenarios:
Contributions to a qualified tuition plan. Contributions by a parent or grandparent to Section 529 programs are treated as completed gifts even though the account owner – typically the child or grandchild – has the right to withdraw them. As such, they qualify for the up-to-$15,000 annual gift tax exclusion in 2021 (same as 2020).
Anyone contributing more than $15,000 may elect to treat the gift as made in equal installments over the year of the gift and the following four years so that up to $60,000 can be given tax-free in the first year.
Direct payments of tuition to an educational institution. Tuition payments made directly to an educational organization are exempt from the gift tax even if the amount exceeds the $15,000 annual exclusion amount. No gift tax return needs to be filed.
Spousal Gifts
You and your spouse can make a gift up to $30,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting.
You can also give an unlimited amount of property to your spouse unless your spouse is not a U.S. citizen, in which case you can give away up to $100,000 indexed for inflation; the 2021 amount is $159,000 ($157,000 in 2020) per year free of gift tax. Any property given to a tax-exempt charity avoids federal gift taxes.
Gift Tax Returns
Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year, which in 2021 is $15,000. You do not have to file a gift tax return to report gifts to political organizations for its use, charities, and gifts made by directly paying someone’s medical expenses.
Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.
Federal Income Tax
Making a gift does not ordinarily affect your federal income tax, and you cannot deduct the value of gifts you make (other than deductible charitable contributions).
