Gifts Can Have Consequences
People make small gifts to friends for Christmas, birthdays, anniversaries, and the like without thinking twice. Bigger gifts need to be thought through more carefully. Maybe it’s to help someone finance the purchase of a home, or to buy a car. Perhaps your estate is large enough that you would prefer to pass some of it on before you die to minimize estate taxes. Regardless of the reason, many people don’t understand all the rules associated with making a relatively large gift to a friend or family member. Here are some points to remember:
- According to the IRS, a gift is any transfer to an individual for less than fair market value in return. No gift occurs if I sell my car to my son for the fair market value Kelly Blue Book price. However, if I simply transfer the title to him for free, or sell the car to him for far less than the fair market value, then I have made a gift of the difference between the fair market value and what I received in return. Similarly, if I loan my son $100,000 and he signs a promissory note to pay it back and I subsequently forgive the loan, then I made a gift of the outstanding loan value.
- Know that there can be a tax on making gifts. It doesn’t come up that often because there is a gift tax exemption, which for 2025 is $19,000 per person. If you are married, then one spouse can use both spouses’ exemptions for a total of $38,000 without any gift tax consequences. This is referred to as a “split gift”. Once you get over the threshold of $19,000 for an individual or $38,000 for a married couple, then the IRS imposes a “gift tax.” The exemption runs to each gift receiver so a single person can make lots of gifts to different people without any tax as long as no individual person receives more than $19,000.
- You can make certain gifts over and above the annual exemption listed above without incurring a tax. Tuition or medical expenses, gifts to spouses and even gifts to political organizations do not have an annual exclusion limit. The same is true for gifts to qualifying charities. However, those gifts must be made directly to the educational institution or medical provider. You can’t give the gift to your loved one as reimbursement for what they already paid for tuition or medical expenses.
- If there is any gift tax to pay, it’s not paid by the receiver of the gift (donee) but instead is paid by the giver of the gift (donor). A gift of a new car to my son (fat chance) does not trigger any income tax for him.
- Gifts to friends and family are not tax deductible by the giver (donor). Gifts to charitable organizations might be tax deductible depending on the status of the organization.
- How does the IRS know if you made a taxable gift over the annual exclusion? The onus is on the giver of the gift who is required to file a gift tax return Form 709. It’s been said that gifts over the annual exclusion are one of the most underreported tax transactions in the United States.
- One of the most misunderstood elements of the gift tax is just exactly how it’s paid. Making a “taxable” gift does not increase your income taxes for the year of the gift. Instead, your “taxable” gift simply eats away at your lifetime estate/gift tax exemption. Currently, for a single person the exemption is almost $14 million so if you make a gift of say $29,000 in 2025, then you are $10,000 over the gift tax exclusion and the result is that your estate/gift tax exemption at the time of your death moves down from $14 million to $13,990,000 (I rounded it to make it easier to understand but you get the idea). This is not that big a deal unless the gift you give is large and your estate is also really large. The only possible way you would pay a tax in the year you made a gift is if you had already made so many gifts that you ate up your total $14 million estate tax exemption. For most people it’s a nonissue.
- As I’ve indicated in prior posts, you should understand the capital gains consequences of making a gift of appreciated property. Writing a check for $10,000 as a gift to someone has no capital gains tax consequences because it’s cash. But if you give someone $10,000 worth of Apple stock that you bought years ago for $1,000, then the receiver of that Apple stock gift is treated as though they bought the Apple stock for $1,000. That’s called their basis in the stock, and if they immediately sell it for $10,000, then they have $9,000 of capital gains. However, if instead of giving the Apple stock while you are alive you create an estate plan that gives $10,000 of Apple stock to someone after your death, then the receiver of that gift at your death is treated as though they bought the Apple stock for $10,000, not $1,000. They get a step-up in basis. Death transfers wipe out capital gains while lifetime gifts do not. As a result, it’s almost always better to give cash rather than appreciated stock or real estate if you intend to make a lifetime gift.
If you intend on making a large gift you must be aware of the basic rules regarding exemptions and tax filings. You should also be aware of the capital gains tax issues as well. Hopefully the information above will give you more confidence in exploring your options for making gifts.
Fun fact: Speaking of gifts, the word “philanthropy” literally means “the love of humanity.” George Peabody is considered the father of modern philanthropy. He was born into poverty in South Danvers, Massachusetts, and rose to tremendous wealth. He subsequently gave almost all of his fortune away so as to set an example to other wealthy people in the mid-1800s. As a result, they renamed the town in which he was born to Peabody in honor of his generosity.
