The federal tax filing deadline for individuals has been extended to May 17, 2021. Quarterly estimated tax payments are still due on April 15, 2021. For additional questions and the latest information on the tax deadline change, visit our “IRS Announced Federal Tax Filing and Payment Deadline Extension” blog post.

For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.

Who pays?

If you’re worried about paying taxes on a gift you received from a friend or relative, relax. The federal gift tax is paid by the givers of gifts, not by the recipients. That’s because the gift tax is designed to prevent wealthy people from avoiding inheritance taxes by giving away most of their wealth while they’re alive. So, if your best friend wins the lottery or your boyfriend signs with the NBA and they want to drop some serious bling-bling on you, let them. They’ll have to pay any taxes, not you.

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You can give away more than $11.58 million (2020) during your lifetime without owing any gift tax

If you’re the one doing the giving, you can relax as well. As of 2020, you can gift your friends and family more than $11.58 million in cash or assets throughout your life and still not owe any gift taxes.

  • For 2020, the lifetime gift tax exclusion was raised to $11.58 million.
  • Your spouse can give an additional $11.58 million during their lifetime and you typically still won’t owe gift tax.

Because of the lifetime exclusion, you probably won’t owe any gift tax. However, if your gift exceeds the annual limit ($15,000 for 2020) you need to file a gift tax return anyway.

Filing gift tax returns

Let’s say you’re the one who gives a gift valued at $20,000. As long as that gift doesn’t push you over the $11.58 million mark for all of your lifetime gifts that exceed the annual gift exclusion amount, you probably won’t owe tax on it. However, you will have to file a gift tax return reporting it. That’s because it exceeds the annual federal gift tax exclusion of $15,000 in 2020.

With the 2020 annual gift tax exclusion, you can give up to $15,000 to any number of individuals without having those gifts count against your $11.58 million lifetime exemption. But if a gift exceeds $15,000, you’ll have to report it and deduct the amount above $15,000 from your lifetime exclusion. (The $15,000 exclusion may increase after 2020 to account for inflation.)

Example: You give two people cash or property worth $25,000 each. You give another favored friend or relative $15,000. The two $25,000 gifts are considered taxable gifts since they exceed the annual exclusion of $15,000 per person.

  • Assuming you’re still below your lifetime exemption amount, you won’t owe gift tax, but the taxable gifts will reduce your lifetime exemption by $20,000
    • ($25,000 - $15,000) x 2 = $20,000.
  • The separate gift of $15,000 doesn’t affect your lifetime exemption since it does not exceed the annual exclusion of $15,000 for 2020.

Let’s say you have a big family and you give three other relatives $10,000 each in 2020. Since each of these gifts is less than the $15,000 annual gift exclusion, you can ignore them for tax purposes.

The federal estate tax exemption

The federal estate tax exemption is the same $11.58 million (2020) as the gift tax exclusion. Any amount up to the exemption amount that you leave to friends or relatives will not be subject to the federal estate tax. Your spouse can pass along an additional $11.58 million free of federal estate taxes.

The gifts you give throughout your life will reduce the size of your taxable estate. At the same time, any gifts that exceed the annual $15,000 exclusion will reduce not only your lifetime gift tax exclusion, but they will also reduce the size of your estate tax exemption.

Example:

  • The two $25,000 taxable gifts in 2020 from the previous example would reduce your 2020 estate tax exemption by $20,000 to $11,560,000 ($11,580,000 - $20,000)
  • The $15,000 gift in 2020 and the additional three $10,000 gifts in 2020 wouldn’t affect your estate tax exemption.

Hint: Gifting friends and family up to the annual exclusion amount of $15,000 each (tax year 2020) can reduce your taxable estate without incurring negative tax consequences.

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Special rule for college savings contributions

You can help a future student by contributing to what is known as a 529 college savings plan. Under a special rule, you can make a lump-sum contribution of up to $75,000 (tax year 2020). The gift is treated as though it is spread over five years to count as 5 gifts of $15,000 each and avoids gift tax consequences.

Example: You contribute $75,000 to a 529 college savings account on behalf of your child in 2020. Your spouse contributes another $75,000 to an account for the child.

  • You’re allowed to spread the gift across tax years 2020-2024 without exceeding the annual $15,000 gift tax exemption and without affecting either your $11.58 million estate tax exemption or your $11.58 million lifetime gift tax exemption.
  • Your spouse can also spread a separate $75,000 college savings contribution over five years with no negative effects.

Important: You won’t be able to give any additional cash or property gifts to the recipient of your college savings contribution during those five tax years without filing a gift tax return and reducing your lifetime gift exemption.

Tax-exempt gifts

Some kinds of gifts are exempt from the gift tax. You’re allowed to make gifts of any amount in the following categories without having to file gift tax returns or having any gift tax or estate tax consequences:

  • Contributions to IRS-approved charities
  • Gifts of cash or property to a spouse (provided he or she is a U.S. citizen)
  • Paying another person’s medical bills, provided that you give the money directly to the medical service providers
  • Covering someone else’s tuition costs, again provided that you make the payments to the educational institution. (This exemption applies only to tuition, but covering up to $15,000 of book, room and board, and other expenses can be done with a gift to the student that’s covered by the annual gift tax exclusion.)

Filing a gift tax return

You’re required to file Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return whenever you give a gift that exceeds the 2020 $15,000 annual gift exemption.

  • You must report gifts in excess of $15,000 even though you won’t owe any gift tax due to the 2020 $11.58 million lifetime exemption.
  • A gift tax return must be filed by the usual income tax filing deadline of the year after you make the gift.
  • If you file for an income tax extension, the extension deadline applies to the gift tax return as well.

A married couple is not allowed to file joint gift tax returns. Instead, spouses are required to file separate gift tax returns when they make taxable gifts. You’re allowed to divide gifts with your spouse. By making two gifts instead of one, you can cover part of the gift with your own annual gift tax exclusion and cover the other part with your spouse’s exclusion, even though the entire gift is made by you.

Example: You give $30,000 to one of your children in 2020. You treat it as a split gift. This allows you to shelter the entire $30,000 using your $15,000 gift exclusion and your spouse’s $15,000 gift exclusion. As a result:

  • Your $30,000 gift does not trigger the gift tax.
  • You and your spouse’s $11.58 million lifetime gift tax and estate tax exemptions are not reduced.

When you split a gift, you’re required to have your spouse’s consent and file Form 709.

Additional information

The information presented above covers only the basics of the federal gift tax. For additional information, consult IRS Publication 950: Introduction to Estate and Gift Taxes. You can also review the Form 709 instructions.

When you use TurboTax to prepare and file your tax return, we’ll ask simple questions about your tax situation, including any taxable gifts you gave, and identify all of the tax breaks that can lower your tax bill or possibly put a refund in your pocket.