Almost everyone loves gifts, both giving and receiving them. And most of the time, gifts and taxes don’t overlap too much. But in some cases they do, which often leads to the question of whether any gifts are tax-deductible.
While you are safe most of the time, it is important to understand when you need to pay taxes on gifts that are received or may receive a tax break when you give them to someone else.
This article breaks down the guidelines about taxable gifts, including gifts that are tax-deductible and tax-exempt.
Tax Deductible Gifts vs. Tax-Exempt Gifts
There’s a difference between tax-deductible and tax-exempt.
There are several different kinds of gifts that are exempt from the mandatory gift tax, including gifts to your spouse, gifts to political organizations, paying for another person’s medical or educational costs, or any other gifts that fall within the annual exemption value of $15,000 per recipient.
So, there’s probably no need to worry about having to pay a gift tax on your family’s Christmas presents. But tax-deductible is different. Gifts, in general, are not tax-deductible. In fact, there are only two kinds of gifts that may get deducted on a tax return: charitable donations and business gifts.
Let’s look quickly at each of those:
- Charitable donations are pretty much exactly what they sound like: gifts you give to a not-for-profit organization to help them to fulfill their mission. Any gifts you make to a charity are tax-deductible if the charity qualifies to allow that to happen. A charity must be a registered 501(c)3 entity in good standing for the donations to get considered tax-deductible.
- Business gifts are either gifts that your business pays for or gifts that you give on behalf of your business, and some of them can be tax deductible up to a point, depending on how you handle and report them.
Here are a few examples of gifts that would qualify as examples of business gifts:
- Promotional gifts, such as pens, koozies, t-shirts, frisbees, key chains, etc. are tax-deductible as long as they have your company name printed on them, cost less than $4 a piece, and are distributed widely (not just to one or two clients).
- Entertainment gifts, such as concert tickets, trips, and meals can be considered business expenses and are tax-deductible up to 50% of their value.
- All other gifts are tax-deductible up to $25 per recipient per year. A gift to a person’s spouse usually counts as a gift to that person.
The first step is to determine what type of gift you are giving or receiving and if it qualifies for a tax-exempt gift or tax-deductible gift.
How Much Is the Gift Tax?
A gift tax is something that gets imposed by the IRS when you transfer money or property to another individual. Examples of a gift tax include parents gifting money to their children or passing down a vehicle to a teen driver who recently got their license.
Whether or not a ‘gift tax’ applies to the dependent is based on a few factors. First, the amount of the gift needs to remain below the gift tax exclusion, which is $15,000 for 2020. There is also a lifetime exclusion applicable to a few wealthy individuals that sit at $11.58 million.
In nearly every circumstance, the donor of a gift is responsible for taxes, not the recipient. However, if the donor remains under the annual or lifetime threshold, a gift tax is not imposed.
Once the gift exceeds the annual or lifetime exclusion, the donor needs to file tax forms that disclose the amount of the gifts. The IRS turns it around by taxing you on the value of the gifts, with pricey rates that range anywhere from 18 to 40 percent.
Do you have to pay taxes on a gift or money? For most American families, the answer is no, unless you receive a substantial inheritance or any other type of significant gift that would exceed the annual $15,000 limit.
What Gifts Are Exempt From the Gift Tax?
Donors can make their lives easier by staying within the annual and lifetime thresholds for offering gifts to an individual. The same rules apply to businesses. The IRS keeps close track of business gifts to make sure they’re both legit and deducted correctly. If your business gives out a lot of gifts (or any gifts), make sure you keep careful records.
In fact, no matter what kind of gifts you give, keep records of them and make sure you only deduct what you’re allowed to from a return. Having to pay extra taxes (or even penalties) for deducting a gift you shouldn’t have could be problematic, and even lead to tax debt problems in the long run.
In general, the following gifts are considered exempt from the gift tax:
- Any gift for a spouse that is a U.S. citizen.
- Anything given to a dependent.
- Charitable donations.
- Political donations.
- Funds presented directly to educational institutions.
- Funds presented directly to medical services or health insurance providers.
Taxable gifts do include cash, checks, property, or even interest-free loans. The rules also apply to anything that gets sold for under fair market value.
Charitable Donations & Business Gifts—Tax Deductible Gifts
You generally do not have to pay taxes on a gift of money or property so long as the value does not exceed annual or lifetime exclusions. Furthermore, in two separate instances, you can deduct gifts from your annual taxes.
Charitable donations and business gifts are two ways that small businesses often take advantage of gifts to receive a small tax break each year on their returns. The IRS does not allow gifts to individuals to be tax-deductible. However, contributions that are to qualified organizations are allowed.
The great thing about charitable donations is not only are they exempt from the gift tax but are also eligible as an itemized deduction on your individual income tax return. Therefore, it does pay to act generously and contribute to recognized charitable organizations.
Additionally, business gifts are tax-deductible yet with several restrictions. For example, the current limit on tax deductions for business gifts is only $25 per employee/client per year, which seems a little low.
Sometimes businesses get creative to avoid the limitations of the tax limit. For example, printing out your company name or logo on merchandise acts as a crafty exception.
Another example is treating employees or clients to a meal or show. While only 50% of the entire meal or show is tax-deductible, it can still help in the long run.
Levy & Associates—The Gift That Keeps on Giving
How much money can a person receive as a gift without being taxed?
Though the circumstances may vary, the usual advice is that you are safe until you reach a substantial gift that is worth several thousand dollars. Small businesses and individuals can also get a small amount of tax relief by donating to charities or providing gifts to employees.
The best gift you can get you or your business this year is the quality service of a reputable tax professional. Levy & Associates has worked with numerous small businesses helping them overcome many of the hurdles that are related to dealing with taxes.
We can help with your small business. Furthermore, we are happy to assist families dealing with unusually large gifts such as estates or other circumstances where the gifts may exceed or near the gift tax threshold.
Contact a knowledgeable tax professional today at Levy & Associates. The initial consultation is free of charge, and we can present ways to assist you with your needs. Levy & Associates is available at www.levytaxhelp.com or 800-TAX-LEVY.