Do We Have to Pay Federal Income Tax When We Give Gifts to Relatives?

Whether you can't stand to see your relatives stuck in a financial rut or you just want to share some of your personal wealth, the IRS might rain on your parade of gifts if you give your relatives substantial sums of money. The only person you can give unlimited amounts of money to for any purpose is your spouse, so your generosity to other relatives might cause you to owe gift taxes.

Annual Exclusion

If you don't give any relative more than the annual exclusion, you won't be taxed by the IRS for being too generous. As of 2014, you're allowed to give any person up to $14,000 each year without any gift tax implications. That means you could give your sister, mother, uncle and nephew $14,000 each and still not have to file a gift tax return. However, if you give just one relative, say your nephew, $15,000, then you must file a gift tax return.

Lifetime Exemption

Besides the annual exclusion, you're also allotted a lifetime exemption from transfer taxes -- the gift tax and the estate tax -- which is set at $5,340,000 as of 2014. That means you can give away that much money over the course of your lifetime, and at your death, before you have to pay either gift or estate taxes. For example, say that you give your nephew $15,000. The first $14,000 is covered by the annual exclusion. The last $1,000 drops your lifetime exemption from $5,340,000 to $5,339,000, but you won't owe any taxes.

Special Purpose Gifts

The IRS also has two significant exceptions on gifts to anyone, including relatives, being counted as gifts. First, you can pay tuition costs in any amount as long as it's paid directly to the school. Second, you can pay any amount of medical expenses as long as you pay it directly to the service provider. For example, say your niece is in college and you want to pay her $30,000 tuition bill. If you write her a $30,000 check, that counts as a taxable gift, even though she might use it for tuition. But if you pay the tuition bill directly to the school, you're off the hook for gift taxes.

Gift Splitting

If you're married, you have an additional weapon in your arsenal to avoid gift taxes: gift splitting. As long as your spouse consents, you're allowed to treat all gifts that you make as made half by you and half by your spouse, effectively doubling the amount you can give each year. For example, if you alone write a $20,000 check to your brother to help with a down payment, you just made a $6,000 taxable gift because you're over the $14,000 limit. But if you gift split, the gift is treated as if it were made $10,000 by you and $10,000 by your spouse, so none of the gift is taxable to either of you.


About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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