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!

Are Holiday Gifts Subject to the Gift Tax?

The short answer: yup! But the more nuanced answer is that if you are giving a gift or receiving a gift in California, you probably won’t end up paying any gift taxes on holiday gifts.

Let’s take a look at the mechanics of a holiday gift. Without getting overly complicated, a holiday gift is a donative transfer of an asset from one person (donor) to another (donee). A “donative transfer” simply means that no one traded you or paid you anything for it (as in, it’s a true gift). Just like the government taxes your income (income taxes), certain goods sold (sales tax), and also real estate that you own (property taxes), it also taxes the donative transfer of assets. So the gift tax is a transfer tax.

A couple of details: the gift tax is only imposed by the federal government--so only the IRS will tax you, not the state of California--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.

There are two types of gifts: those you give during life (intervivos) and those you make after you die (like through a will or trust). We’re going to focus on intervivos gifts since most holiday gifts are given during life.

Here’s why most of you will not owe any gift taxes on your holiday gifts. The federal government has this nifty rule called the “annual exclusion”. What that means is that each of you can make a gift up to $15,000, per year, per recipient, 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 recipient, 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? What happens if you make a gift that exceeds the annual exclusion?

Now we get to the “unified credit” or estate tax exemption amount. The unified credit is an amount the federal government allows you to gift during your entire lifetime, and combine that amount with whatever you own when you die, and not pay any transfer taxes if you are below the unified credit amount. It’s an amount set by law, and it increases every year based on inflation. The credit amount in the year that you die is what is applied. The exemption level for 2018 is $11.18 million. For example, let’s say you die in 2018 (sorry to bum you out!)--if the total of what you gifted during your life, and what you owned at death is less than $11.18 million then you would pay ZERO transfer taxes. For 2019, that number increases to $11.4 million.

Let’s recap: if you make a gift to someone that’s valued at $15,000 or less, per person, you don’t have to report it, and no transfer taxes are owed, and there’s no reduction in your unified credit amount. If you make a gift in excess of $15,000 but less than the unified credit (currently $11.18 million), you won’t owe any transfer taxes, but you’ll need to report it to the IRS. They’ll walk over to your file, and deduct the amount of the gift from your unified credit amount. For example, if you gift $20,000 to your favorite niece this year, you would report a $5,000 gift ($20,000 - $15,000 exclusion amount) and the IRS would walk over to your file and deduct $5,000 from your $11.18 million unified credit. Only $11.175 million left to give before you pay transfer taxes!

Happy Holidays! And don’t forget to send those ‘thank you’ cards!