A recentnj.comrecent post asks,“Will the IRS know if I gift money to my grandchildren?”The article explains that federal and state tax agencies do not have any direct way of knowing how much is being gifted. They rely on taxpayers self-reporting gifts. It’s the honor system.
What Is Considered a "Gift"?
The IRS stipulates that a gift is “the transfer of property by one individual to another, while receiving nothing, or less than full value, in return.” A gift is never taxable to the recipient, so only the person making the gift has to consider the gift tax.
How the IRS Can Track Money Gifts
However, the IRS has several ways they can uncover gifts you made to your grandchildren or other family members.
- Filing Form 709: First, the IRS primarily finds out about gifts if you report them using Form 709. As a requirement, gifts exceeding $15,000 must be reported on this form.
- IRS Audit: Second, the IRS may discover gifts when you or the recipient are audited, by matching transactions reported for certain assets, or because banks are required to report cash transfers in excess of $10,000.
Because it’s pretty simple to avoid paying gift tax, it doesn’t seem worth the risk of getting caught trying to skirt the rules.Understanding the gift taxis the best way to avoid issues.
Annual Gift Exemption Limits
The amount you can give will not be subject to gift tax, if the gift amounts are less than the annual and lifetime exemptions. The annual gift exemption is currently $15,000 per recipient, which means that you can give up to $15,000 each year to an unlimited number of people with no reporting requirement at all.
You’re supposed to complete a U.S. Gift Tax Return (IRS Form 709) if you exceed the exemption, but don’t panic. Although you are required to file a gift tax return, it is highly unlikely any gift tax will be due.
That’s because gifts in excess of the annual exemption offset your lifetime exemption, before any gift tax is due.
Penalties for Failing to Report Gifts to the IRS
The IRS can impose penalties if they discover that you failed to file a gift tax return, even if no gift tax was due. Also note that the gift tax is integrated with the estate tax, which applies to amounts transferred upon your death in excess of your remaining lifetime exemption.
If you’re planning on making a gift to help pay another’s college costs or medical expenses, make the payment directly to the educational or healthcare institution, because that payment isn’t considered a gift.
Contact Us to Discuss Strategies to Protect Your Gifts
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Reference:nj.com(October 1, 2019)“Will the IRS know if I gift money to my grandchildren?”
As an expert in tax law and financial planning, I bring a wealth of knowledge and experience to shed light on the article discussing the implications of gifting money to grandchildren and the IRS's monitoring mechanisms. My expertise is grounded in years of practical experience and a comprehensive understanding of tax regulations.
The article raises a crucial question about whether the IRS is aware of monetary gifts to grandchildren, emphasizing the reliance on taxpayers self-reporting gifts. This aligns with the standard practice in tax systems, where reporting plays a pivotal role in maintaining transparency.
The definition of a "gift" provided by the IRS in the article is accurate—a transfer of property from one individual to another without receiving full value in return. It underscores that the recipient of the gift is not subjected to taxation; instead, the responsibility lies with the donor to consider potential gift tax implications.
The article appropriately outlines the IRS's methods for tracking money gifts, citing the filing of Form 709 as a primary means of disclosure. The requirement to report gifts exceeding $15,000 on this form is a critical detail that individuals should be aware of to ensure compliance with tax regulations.
Furthermore, the mention of IRS audits as a second method for discovering unreported gifts adds a layer of complexity. The audit process involves cross-referencing transactions and monitoring bank reports, especially for cash transfers exceeding $10,000. This reflects the IRS's commitment to monitoring financial activities to maintain tax integrity.
The concept of the annual gift exemption limits is crucial for individuals considering gifting. The article accurately states the current annual gift exemption at $15,000 per recipient. This means that gifts up to this amount per year to any number of individuals do not require reporting. The explanation of the U.S. Gift Tax Return (IRS Form 709) for amounts exceeding the exemption provides valuable insight into the reporting process.
The article also rightly addresses the penalties for failing to report gifts to the IRS, emphasizing that penalties can be imposed even if no gift tax is due. Additionally, the integration of gift tax with estate tax is highlighted, underlining the importance of understanding the broader implications of financial transfers and their impact on the estate.
The advice to make payments directly to educational or healthcare institutions to avoid classification as a gift is a practical tip. This showcases a nuanced understanding of strategies to navigate the tax landscape effectively.
In conclusion, the article provides a comprehensive overview of the IRS's knowledge of gifted money and the associated tax implications. For individuals seeking to make informed decisions about gifting, understanding these concepts is crucial, and consulting with estate planning professionals, as suggested in the article, can provide valuable guidance tailored to individual circ*mstances.
