Are Holiday Gifts Taxable?

The short answer: Yup! But, spoiler: you probably won’t end up paying any gift taxes on holiday gifts.

A holiday gift is a donative transfer of an asset from one person (donor) to another (donee). A “donative transfer” simply means that the donee didn’t have to do or pay anything for it. It’s a true gift! It’s also a gift that you’re giving during life (intervivos) - as opposed to a gift that you make after you die (i.e. through a will or trust).

There is a tax that could be imposed, but that requires a little more explanation. Just like the government taxes things from your income (income taxes), to certain goods sold (sales tax), to real estate that you own (property taxes), it also taxes the transfer of items. So the gift tax is a transfer tax.

The gift tax is only imposed by the federal government (think: IRS); California doesn’t tax gifts. And it’s only imposed on the donor (the person giving the gift). If you receive a gift, and you live in California, you’re not on the hook for transfer taxes. If you give a gift, and you live in California, you still won’t owe any gift tax to the State of California and probably won’t owe any gift taxes to the federal government.

Here’s why: The federal government has this nifty rule called the “annual exclusion.” What that means is that each resident of the USA can make a gift up to $15,000, per year, to any other person, and not owe any taxes on that gift. In fact, the IRS doesn’t even want to know about it! You don’t have to report it. Married couples can combine that exclusion amount to $30,000 to one person, per year, and still fall within the same rule. So put another way, you’d have to be awfully generous this holiday season to have to deal with gift taxes.

Well, what if you are that generous?

If you make a gift in excess of $15,000 but less than what is called the exemption amount (currently $11.58 million per taxpayer for 2020; $11.7 million for 2021), you won’t owe any gift taxes. However, you do need to report it to the IRS. Once reported, the IRS will deduct the amount of the gift over $15,000 from your total exemption amount that you’re entitled to when you die. For example, if you give a $75,000 gift to your favorite niece this year, you would report a $60,000 gift ($75,000 - $15,000 exclusion amount) and the IRS would walk over to your file and deduct $60,000 from your $11.58 million unified credit. Only $11.52 million left to give before you pay transfer taxes! (The exemption amount involves estate taxes, which we can explain and discuss with you as part of your estate planning process.) 

Until then, may you have a safe, healthy, and generous holiday season!