You may not think of financial gifts as potential financial burdens for the people who receive them, but gifting a large amount of cash can trigger big tax bills. While the giver must pay income taxes on the money they’re gifting, a recipient should know their gift tax rates and may also need to pay tax on the cash after they receive the money.
Is there any way to give monetary gifts without placing stressful tax obligations on the people we want to give money to? Can you help friends or relatives contribute to the down payment on your new home for sale in San Angelo, TX without hefty tax penalties?
If you want to spread the wealth this year — without racking up a bigger tax bill for yourself or your recipient — try one of these ways to avoid paying tax on financial gifts.
Stay under the limit
The easiest way to avoid owing more in taxes is to keep your generous financial gift within the limits set by the IRS. You can give up to $14,000 per person, and the recipient of the funds won’t be required to pay taxes on the cash. “Per person” means you can give up to $14,000 each to three friends or relatives, and each gift would be tax-free for those friends or relatives. However, giving $20,000 to one person would trigger the need to pay a gift tax.
There are some exceptions to this limit, however. You can also avoid paying tax on financial gifts if you’re giving money to your spouse, making charitable gifts to organizations with nonprofit status, or giving to political groups.
If a relative wants to gift you money for a down payment, that individual needs to keep their gift under that $14,000 limit. A small workaround here: The limit applies to individuals. This means that if your aunt and uncle wanted to help you get into your first home, they could each gift you up to $14,000 — for a total of $28,000.
Allocate gifts to particular exempt expenses
Other tax-free exemptions on financial gifts include things like school tuition and medical payments. Let’s say you have a relative who wants to give you some cash to help with your mortgage payments. But the annual total of the gift is over the $14,000 limit.
You can avoid paying tax on this financial gift if your relative can give you money for education or medical expenses that you might also have. They can pay tuition or medical costs, tax-free, directly to the qualifying institution or provider. Then you can allocate the money you didn’t have to spend on these expenses toward your mortgage.
Encourage parents to use Roth IRAs
Your parents can make financial gifts to you without boosting your tax bill by contributing to a Roth IRA in your name. You won’t pay taxes on the money — and your funds get a chance to grow tax-deferred.
A Roth IRA makes sense to use as a vehicle for financial gifts because of some special allowances for how you can use the money in the account. A Roth is a retirement account, and in most cases you can’t withdraw funds before age 59½ — unless you’re willing to pay a hefty tax penalty.
In some cases, however, you might qualify for an exception. And you most likely do if you’re using the funds to purchase a home. You can use up to $10,000 of Roth funds, without penalty, to purchase your first house. Others can also gift you money out of their own Roth IRAs to help fund the purchase of your first home.
