Cash Gifts and Your Taxes, Understanding Your Limits and Federal Obligations
How Much Yearly Can You Gift Someone Without Them Paying Taxes on It?. Although taxpayers can give unlimited annual gifts to qualified charities without paying federal income taxes on their gift transfers, they cannot give unlimited gifts to private individuals. The Internal Revenue Service allows taxpayers to give limited annual gifts to relatives or other private parties without paying income taxes on their transfers. Furthermore, recipients of their gifts are exempt from federal income taxes, regardless of the amounts they receive. The IRS treats gifts and inheritances similarly.
The federal gift tax laws allow taxpayers to give away property within annual exclusions without subjecting either gift donors or recipients to federal income taxes. Although the IRS taxes all income, including wages, commissions, exchange of services, bonuses, real, personal property, and prizes as income, it provides a limited exception for taxpayers to give gifts without triggering income tax liabilities for either party. Because of the federal tax benefits given to recipients and donors of gifts, the IRS strictly limits its definition of a tax-free gift. According to the IRS, a gift includes personal or real property and cash, as long as the donor does not receive anything in return and does not expect anything from the recipient.
Gift Tax Limits
Congress establishes the gift tax limits annually. Effective Jan. 1, 2009, and current as of 2015, taxpayers are subject to a $13,000 gift limit. The maximum gift allowance before a donor becomes responsible for paying gift taxes prior to giving the gift is $13,000 annually. The $13,000 limit applies to each individual receiving a gift. Thus, a taxpayer can give equal gifts of up to $13,000 for each of her five grandchildren annually without paying income taxes on their gifts. Furthermore, her grandchildren will not have to pay gift taxes on their gifts, regardless of the fair market value of their gifts.
Increasing Gift Allowance
The IRS allows married taxpayers to aggregate their gift limits. In other words, husbands and wives who file taxes as married taxpayers filing jointly can give joint gifts of up to $26,000 annually per recipient. For example, a grandmother and grandfather can give each of their five grandchildren $26,000 annually without paying taxes.
Real and Personal Property Gifts
Taxpayers who give cash gifts can easily determine whether their gifts exceed the annual gift tax limit. However, for taxpayers who give real or personal property gifts, establishing the value of their gifts is more difficult. Under the tax code, taxpayers who give personal or real property gifts may have to obtain professional valuations by certified appraisers to determine the fair market value of their gifts. The IRS requires that appraisers establish fair market value of the gifts they are valuating by considering the price that a willing purchaser would spend to buy the gift. Furthermore, although taxpayers are not initially subject to income taxes on their gifts, they may have to pay income taxes if they later sell their personal or real property gifts.