Who doesn’t like opening an envelope or a card to find a
nice wad of cash stuffed inside? While it may not be the most personal gift in
the world, pretty much everyone loves getting cold, hard cash! What people
often don’t realize, however, is that that “free” money isn’t so free.
When you receive a monetary gift, you are, by law, supposed
to pay income taxes on that gift in most cases. In fact, even if you’re the
giver, you’re supposed to pay income taxes on the money you’re giving away.
Don’t let that rule put a wrench in your plans for gifting
money this year, however. By knowing a few simple tips, you can gift money to
your loved ones without forcing them to pay outrageous taxes in the process.
Tip #1: Know The “Gift-Giving”
Limit
Each year, the IRS puts a “gift” limit in place. Right now,
it’s $14,000 per person. What that means is that you can give as much as
$14,000 to one person without that person having to pay taxes on the gift.
So, as long as you give this amount or less, you don’t have
to feel guilty about your loved one being stuck paying taxes on his present.
And, of course, the same rules apply to you! If you’re lucky enough to get a
cash gift, you don’t have to file taxes on it if it’s under this amount!
Tip #2: Give Gifts
Through Roth IRA Contributions
If you want to give a gift larger than $14,000 or if you
just prefer to gift in a different way than straight cash, consider
contributing to someone’s Roth IRA. If you do that, that person won’t have to pay
any taxes on the money received. Plus, that person’s funds can grow without him
having to pay taxes on the growth right then.
This is also a smart way to give if you want to ensure that
the person will use the gift wisely. In most cases, the money in the account
can’t be taken out, without penalty, until the person has reached the age of 59
and a half, so if you want to give a younger person a gift that will come in
handy in the future, this is a great choice!
Tip #3: Allocate
Gifts
Speaking of using gift money responsibly, if you allocate
financial gifts to an approved purpose, you and the recipient can often avoid
paying taxes on that money.
For example, gift recipients are often exempt from monetary
gifts that are allocated to mortgage payments, medical costs, and tuition
costs. The giver can benefit too; if he or she pays these funds directly to the
institution to which they’re owed, the giver won’t have to pay any taxes on
those payments.
As you can see, there are legal ways around the IRS
rules. Hopefully, one of these methods
will work for you so that you can give to your loved ones without further
burdening them or yourself.