‘Tis the Season: Giving Gifts

Written by Jim Worthington on November 11, 2018

As the year-end holidays approach, many of us are thinking about giving gifts to our family, friends, charities, and even our employees. Tax law has rules that affect this generosity.

In the tax law, a gift is marked by “detached and disinterested generosity.” The person who makes the gift, the donor, does not expect anything of equal value in return.

There is no gift tax on gifts to a spouse who is a United States citizen. However, if one’s spouse is a non-citizen, one can only give $152,000 in 2018 free from gift tax. For other family members and friends, it does not matter if the recipient, the donee, is a citizen or not. For 2018, the annual exclusion is $15,000 for gifts of a present interest; cash is the quintessential present interest. Gifts over that limit in a calendar year are taxable. There is a separate limit to keep in mind here. That limit is the lifetime applicable exclusion amount, which is $11,180,000 in 2018.

All of the values in the preceding paragraph are indexed to inflation. Most will increase in 2019 although the annual gift exclusion usually does not increase every year. An example may help all of this make more sense:

Imagine Ebenezer Scrooge, who has never given a gift in his lifetime. In 2018, he gives $195,000 to his nephew, Fred. The first $15,000 of the gift is covered by Ebenezer’s annual exclusion. The next $180,000 is covered by his applicable exclusion amount. However, once he uses any part of that, that part is gone for good. Next year, he will have an even $11,000,000 lifetime applicable exclusion amount plus the inflation-indexed increase that everyone gains in 2019.

Gifts to charities are covered by the charitable income tax deduction and will be addressed in a later blog post.

Gifts to employees are a little trickier. The Tax Code states that a gift to an employee is always compensation. There are some exceptions for de minimis fringe benefits. The rules are quite complicated and even distinguish between a non-taxable gift of a holiday ham and the taxable gift of a gift certificate used to purchase a ham. Employers who want to spread holiday cheer will need to consult their income tax advisors.