IRS Gift Tax 101: What Small Business Owners Need to Know

Having a generous spirit is a good thing right? Major life events, creating memorable experiences, and even the holidays can help you get into the giving spirit. But, is there a downside to being generous?

If you are a small business owner who wants to gift money or assets to family, friends, or charities, you need to understand the rules.  The IRS has limits and exclusions on the gift tax.  Here’s what you need to know…

What Constitutes a Taxable Gift?

The IRS defines a gift as any transfer of tangible or intangible property for less than full payment. This includes money, stocks, bonds, real estate, use of property, and more. 

Some examples include: paying off your parents’ mortgage as a gift, contributing company stock shares to your child’s brokerage account, or even allowing your family member to use your vacation home for free. 

Put simply, if you transfer any assets without getting equally valuable compensation, it is a gift.

Who Pays Gift Tax? 

In most cases, as the gift giver (or donor) you are responsible for paying federal gift tax on the value of gifts exceeding set thresholds. However, the gift recipient (or donee) can legally assume responsibility for the tax instead by signing a gift tax return.

What are the Gift Tax Rates?

Gift tax rates range from 18-40% depending on the size of the gift. For detailed information on tax rate limits, here is a link to IRS.gov.

What is the Annual Gift Tax Exclusion?

Currently, the annual gift tax exclusion amount for 2023 is $17,000 per individual recipient. This means you can give up to $17,000 each calendar year to any number of people without exceeding the annual exclusion threshold and triggering a gift tax payment or filing requirement.  

Exceptions to the Annual Exclusion

While most gifts are subject to the $17K annual limit before requiring tax filings or payment, some common exceptions exist, including:

  • Gifts to your U.S. citizen spouse 
  • Charitable donations deducted on your income tax return
  • Political and educational organization contributions  
  • Payments made directly to qualifying medical and educational institutions

When You Must File Gift Tax Paperwork

You need to file a federal gift tax return (Form 709) if you gift over $17K to any one person this calendar year or you claim gift tax deductions for charitable giving. 

Consequences of Not Filing Required Returns 

If you fail to file a gift tax return when mandatory, you face paying penalties and interest on taxes owed. Protect yourself by consulting your tax advisor if you’re unsure.

Strategies to Minimize Gift Tax Liability  

The good news is several options exist to reduce potential gift taxes, such as:

  • Making gifts to your legally married spouse
  • Donating to valid charities instead of individuals  
  • Spreading larger gifts over multiple years
  • Utilizing your lifetime exemption currently at over $12 million
  • Setting up an appropriate trust 

Get Personalized Guidance on Gift Tax Rules  

While this overview covers key federal gift tax basics, state laws differ. And with shifting regulations, individual circumstances vary. Connect with an expert to discuss your unique situation and gift tax planning opportunities. Our goal is helping you give generously while minimizing taxes owed. Reach out today to ensure you stay compliant – and keep more wealth to spread joy within your family and community.

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