Is Gift Money Taxable?

When your generous Aunt Betty slips you a check on your birthday or you make an annual donation to your favorite cause or alma mater, you may wonder whether the IRS will take notice. While the answer isn’t as simple as “yes” or “no,” the good news is that the limit at which the gift tax kicks in for givers (and thus when you may need to pay taxes) is high enough that most people will never have to worry about this issue.

Generally, any asset—like cash, property or stocks—that you give to someone else without receiving something of equal value in return is considered a gift by the IRS. Typically, you will have to report the value of this gift on your federal income tax return, and you’ll be required to pay any applicable taxes. However, the good news is that there are several exceptions and strategies that can help you avoid paying any gift tax.

For example, if you loan your friend some money without charging interest—or if they forgive the debt completely—the IRS considers that a gift. If you put someone as a joint owner on your bank account, allowing them to withdraw funds at will, this is also a gift under the IRS’s eyes. Even giving someone a prepaid credit card or gift certificate is considered a gift, according to the IRS.

There are also limits on how much you can give each year before the IRS starts taking notice. For 2021, this is $16,000, but this figure can change each year as the IRS adjusts it to keep up with inflation. It’s important to talk with a tax professional before making large gifts, as the rules can be confusing.

Additionally, there are specific items that are exempt from the gift tax—such as medical and educational expenses that you pay for someone (as long as those payments are made directly to the health care provider or university) and gifts of cash to a charitable organization. If you’re interested in learning more about the IRS’s rules on gifting, a Rocket Lawyer network attorney can provide helpful guidance at an affordable rate.

Although gift taxes can seem complicated, they are designed to encourage generosity. So, don’t let the fear of a potential gift tax bill keep you from giving or getting the help that you and your loved ones need. If you have any questions about the gift tax, speak with a Rocket Lawyer network attorney for affordable legal advice or check out our guide on how to file a simple federal tax return. Then, you can focus on giving and enjoying the blessings that come with generosity.