Gifts are a favorite pastime of almost everyone, giving and receiving. Gifts and taxes rarely overlap. However, in some cases they may overlap. This often leads to the question whether gifts are tax-deductible.
Although you may feel safe most of time, it is important that you understand when gifts you receive or give to others are subject to tax.
This article explains the rules regarding taxable gifts. It also includes gifts that are both tax-deductible or exempt.
Gifts that are tax-deductible vs. Gifts exempt from tax
There is a distinction between tax-deductible or tax-exempt.
There are many gifts that are exempted from the mandatory tax. These include gifts to your spouse and gifts to political organizations. They can also be used to pay for the medical or educational expenses of another person.
There is probably no reason to worry about your family having to pay a gift-tax on Christmas gifts. Tax-deductible gifts are different. Gifts are generally not tax-deductible. There are two types of gifts that can be deducted from a tax return: business gifts and charitable donations.
Let’s take a quick look at each one:
- Charitable contributions are exactly what they sound. They are gifts that you give to a non-profit organization in order to support their mission. If the charity allows it, any gifts that you give to charity are tax-deductible. To be tax-deductible, a charity must be a registered nonprofit 501(c),3 organization in good standing.
- Business gifts are either gifts your business purchases or gifts you give to your business. Some may betax-deductible up to a certain point depending on how they are handled and reported.
These are some examples of gifts that could be considered business gifts.
- Promotional gifts include pens, koozies and t-shirts as well as frisbees and key chains. They are tax-deductible, provided they are printed with your company’s name, cost less than $4 per piece, and distributed widely (not only to a few clients).
- Entertainment gifts such as tickets to concerts, meals, and trips can be treated as business expenses. They are also tax-deductible up until 50%.
- All gifts other than those listed above are exempted from tax up to $25 per recipient per annum. A gift to someone’s spouse is usually considered a gift to them.
First, determine the type of gift that you are giving or receiving. Also determine if the gift qualifies as a tax-exempt or tax-deductible gift.
What is the Gift Tax?
The IRS imposes a gift tax when money or property is transferred to another person. A gift tax is when someone transfers money or property to another person.
There are a few factors that will determine whether or not the dependent has to pay a gift tax. First, the gift amount must not exceed the $15,000 gift tax exclusion for 2020. A few wealthy people can also enjoy a lifetime exclusion of $11.58million.
Nearly every situation is that the gift donor is responsible for taxes and not the recipient. Gift taxes are not applicable if the donor does not reach the lifetime or annual threshold.
The donor must file tax forms detailing the amount of gifts once the gift exceeds the lifetime or annual exclusion. The IRS reverses the process by taxing the gift’s value at a high rate of 18-40 percent.
Are you required to pay taxes on money or gifts? The answer is no for most American families, except if you have a significant inheritance or other gift that exceeds the $15,000 annual limit.
What gifts are exempt from the gift tax?
Donors can make it easier to give gifts to individuals by keeping within the lifetime and annual thresholds. Businesses must follow the same rules. To ensure that business gifts are legal and properly deducted, the IRS closely monitors them. Keep careful records if your company gives away many gifts or any gifts.
No matter what type of gift you give, it is important to keep track of them and only allow you to deduct the amount allowed in your return. It could lead to tax debt and problems if you have to pay additional taxes or penalties for claiming a gift that was not yours.
The following gifts are generally exempted from gift tax:
- Gifts for spouses who are U.S citizens.
- Anything that is given to a dependent.
- Donations to charities
- Political donations
- Direct funding to educational institutions
- Directly to health insurance providers or medical services.
Gifts that are taxable include cash, checks and property. Anything that is sold below fair market value also falls under the rules.
Charitable Donations & Business gifts–Tax Deductible Presents
Gifts of money and property are generally exempt from tax, as long as they do not exceed the annual or lifetime exclusions. In two cases, gifts can be deducted from your annual taxes.
Charitable donations, and Business gifts are two of the ways small businesses can take advantage gifts to get a tax break every year. Gifts to individuals are not allowed to be tax-deductible by the IRS. Contributions to qualified organizations, however, are permitted.
Donations to charitable organizations are exempted from gift tax and can be claimed as an itemized deduction on your personal income tax return. It is a good idea to give generously to recognized charities.
Business gifts are also tax-deductible, but there are some restrictions. The current limit for tax deductions on business gifts is $25 per client/employee per year. This seems to be a bit low.
Businesses sometimes find creative ways to circumvent the tax limit. As an example, you can print your logo or company name on merchandise.
Another example is to treat employees or clients with a meal or show. Although only 50% of the total meal or show can be tax-deductible it can still make a difference in the long term.
Levy & Associates – The Gift that Keeps on Giving
What amount of money can someone receive as a gift, without having to pay tax?
Although the situation may be different, it is generally advised that you stay safe until you have a substantial gift of several thousand dollars. Individuals and small businesses can get some tax relief by donating or giving gifts to their employees.
A reputable tax professional is the best gift you could give your business or yourself this year. Levy & Associates have helped many small businesses overcome the tax hurdles.
We can assist you with your small business. We are also happy to help families with large gifts, such as estates and other situations where gifts exceed the gift tax threshold.