Many people presume that they can give their money away to their loved ones easily and without penalty as it is their money. Unfortunately, this is not always the case. Annually, there are limits on how much one can give to others per person without having to claim it with the IRS. States also have tax laws on gifting that can complicate things as well. Below is a basic guide to annual gifting. If there are any questions, it is recommended you consult an attorney before transferring any funds, especially if you would like to gift large amounts as it could impact the tax liability of your estate.
One of the most surprising facts about gifting is that the receiver of the gift is not responsible for income taxes. Instead, it is the donor of the gift to pay taxes on all gifts made. There are, however, exemptions to the gift tax.
Every individual may gift $14,000 per person tax free and without incurring any estate tax later on. This means that an individual can make several gifts each year, providing they are to different people. This rate rises with inflation, so you want to check the yearly amount that is approved. This means that, for example, grandparents could gift $14,000 to their children and grandchildren each year without anyone having to claim anything. In terms of long range planning, this technique allows years of gifting without penalty, but is not ideal if you wish to transfer large sums of money.
Gifts to Charity
The IRS does not charge the donor tax on contributions made to charities. The catch, however, is that the charity must be recognized as a charity by the IRS. You can donate any amount to charity, providing they have a determination letter from the IRS. It is recommended that one asks to see this letter before making any large contributions in order to protect yourself.
You can gift any amount from one spouse to the other without taxation. Therefore, spouses can transfer money to each other freely and without penalty. It is important to note, however, that some marriages may be exceptions. For example, some states do not allow domestic partnerships to qualify for marital gifts. Also, there are different rules for spouses that are non-citizens as well. There is an annual gift amount for non-citizen spouses.
These exceptions allow you to gift annually without being taxed. Additional gifting will be subject to tax on the donor and can also be factored into the estate tax. If you want to gift, it is highly recommended you consult an attorney first to ensure you are gifting in the best way, especially if you plan on using Medi-Cal in the future.