Over the years of doing bookkeeping, I have noticed that some of my clients make financial gifts at the personal level. If you are financially well off, you may want to gift money or property to family members or others you care about. If that is the case, there are some gift tax issues you should be aware of. Oh yes, the government even taxes gifts if they are large enough, so it is best to know the rules; otherwise, you may end up making a gift of taxes to the IRS.

The gift tax rules provide two exclusions from gift tax, the annual exclusion and the lifetime exclusion:

Annual Exclusion – The annual exclusion is periodically adjusted for inflation and is currently $16,000 per individual. Thus, you can give $16,000 a year to as many individuals as you wish without any gift tax or gift tax return filing requirements.

Lifetime Exclusion – On top of the annual exclusion, there is a lifetime exclusion that is linked to the estate tax exclusion, which is also inflation adjusted, and for 2022 is $12,060,000. Thus, in addition to the $16,000 annual per donee exclusion, there is a $12.06 million exclusion that applies to the aggregate of all gifts more than the $16,000 per year per donee gifts.

	CAUTION The estate tax rates and the lifetime exclusion have long been a political football. They date back to 2006, when the lifetime exclusion was $2 million. Congress can change the current exclusion at any time. In fact, recent proposed legislation would reduce the exclusion to $5 million.

Special Tuition/Medical Exclusion – In addition to the current $16,000 annual exclusion, a donor may make gifts that are totally excluded from the gift tax in the following circumstances:

·   Payments made directly to an educational institution for tuition. This includes college and private primary education. It does not include books or room and board.

·   Payments made directly to any person or entity providing medical care for the donee.

In both cases, it is critical that the payments be made directly to the educational institution or health care provider. Reimbursement paid to the donee will not qualify. The tuition/medical exclusion is often overlooked, but these expenses can be quite significant. Parents and grandparents interested in lowering the value of their estate should strongly consider these gifts.

Gift Splitting – A husband and wife can each make annual exclusion gifts, thereby increasing the exclusion from the current $16,000 to $32,000 per year per couple. However, only one of the spouses may be in a financial position to make the gifts. Spouses may elect on the gift tax return to treat a gift made by one spouse as being made by both spouses. Gift splitting can be used for annual exclusion gifts, lifetime exclusion gifts, and gifts above the lifetime exclusions.

If you are contemplating gifting money or property to an individual, it may be appropriate to consult a CPA in advance to minimize the impact on estate taxes and help with any gift tax filings that may be required. Making gifts and donations can also impact the way your bookkeeping is recorded. If you currently don’t have a CPA, contact our office and we will connect you to a competent and experienced CPA that will assist you with your tax affairs.