One of the most confusing aspects of tax law is how to handle gifts. When you give someone a gift, it can have various tax implications depending on the type of gift and who receives it. We are going to go over some common types of gifts and what kind of tax laws apply to each one: (1) tangible personal property, (2) money, and (3) intangible property.
When you give someone a gift of tangible personal property, the recipient will have to pay tax on their fair market value as if they purchased it from a store and the giver should receive credit for any taxes that were paid when purchasing said item. If it’s money or something else with no fair market value, the tax implications for both parties are unknown and should be discussed with a tax professional.
When you give someone an intangible property as a gift, such as stock or intellectual property, there will not be any income taxes incurred by either party because it is merely transferring rights to something rather than handing over anything physical that has monetary worth.
Income tax implications for the recipient
The recipient will owe income tax on their fair market value of the intangible property that was given as a gift and nothing more, but if tangible personal property is gifted then they’ll have to pay taxes on its full purchase price (minus any amount paid at the time of purchase).
Income tax implications For the giver
When giving property to someone, the giver will have a tax deduction equal to the fair market value of what was given.
Who can give a gift?
Anyone can give a gift.
Gifts can be given to anyone, but they cannot have any cash backing them up (like what happens with an inheritance). This means that the tax laws apply to the monetary value of what was given, not how much it costs.
What kind of gifts are exempt from taxes?
Gifts worth $14,000 or less. Gifts in this category are not taxed and the person receiving them doesn’t need to report it as income on their tax return either. There’s a special form called IRS Form 3921 that needs to be filled out when gifting more than $14,000 per year but if you’re giving cash, there’s no need to fill out this form.
If you’re gifting stock or other securities as a gift then the tax laws are different too. When someone has an interest in stocks they get two types of dividends: cash and non-cash dividends like shares of company stock. Non-cash dividends have preferential tax treatment at the federal level that can be reduced by state taxes so it would make sense for someone gifting stock to take advantage of this favorable tax law while they still can before any changes might happen with the new administration coming into office next year.
This means that if you want to give $14,000 worth of stuff each year without incurring taxation, all you have to do is divide up the number of years you plan on gifting that amount at the same time over a period of 14 years.
When is the recipient taxed on the gift?
When the recipient cashes in on their gift tax-free. The IRS will view it as a taxable transaction if they sell or use the donated property to pay for something else, like an expense item such as food and clothing. This means that when someone gives you a cash gift of $14,000 each year without incurring taxation, all you have to do is divide up the number of years that they plan on gifting at the same time over a period of 14 years.
How to avoid paying taxes on gifts?
Some people consider a tax-free gift to be the most generous because it allows them to save money and spend more on those items that they really want. For example, if you are someone who is saving up for their child’s college education by putting away $14,000 each year in an account with no taxes being taken off, then you will only have to put away $11,429 each year.
If you receive a gift and want to avoid paying tax on it, then there are two different things that you can do. You could either opt for something like an experience or artwork instead of cash so that the person who is giving the gift doesn’t have to worry about taxes either. Or if they insist on gifting money, then they could give you a gift card so that they can purchase the item for you instead.
The tax implications for gifts can be complicated and confusing. But, with the right information, it’s easy to understand which type of gift you should give to avoid paying taxes on them! Let us help you find out what kind of gifts are exempt from taxes this year so that your business doesn’t have any surprises come tax time. We’ll work with you to create a personalized plan that will make sure all of your marketing efforts are compliant and legal! If we haven’t answered some questions about how these aspects might affect your business or organization, please don’t hesitate to reach out – our team is here to help answer any questions you may have.