Are Presents You Give Subject to the Gift Tax?This holiday season, you may be planning to give a large gift to a family member or loved one. Maybe you’re going to make a hefty contribution to a relative’s college fund, or you want to offer your friend a sizable loan with no interest. Before you start spreading holiday cheer, though, you’ll want to make sure you understand which of your gifts fall under the gift tax. The IRS keeps track of gifts to make sure people are transferring property legally, and not correctly reporting them can draw the taxman’s unwanted attention. To see whether you need to worry about the gift tax, and what you can do to avoid it, read on.

The gift tax

According to the IRS, a gift is a transfer of property to an individual where nothing of monetary value is received in return. It includes both cash and assets, such as real estate, vehicles, collectibles and stocks. Before you start worrying that you may owe back taxes, note that the vast majority of Americans will never have to actually pay the gift tax. In 2016, only 2,700 people in the entire U.S. owed money to the IRS for gifts, and most of those people gave away more than $1 million. Even still, you should know when you need to report your gifts to the IRS so you can keep your tax records completely square and stay out of trouble.

It’s likely that you won’t need to file a gift tax return for most of the gifts you give around the holidays. Every calendar year, you have an annual exclusion for gifts, which is the value of gifts you can give that are excluded from your taxes. As of 2018, that exclusion is $15,000 per recipient, so for example if you give $15,000 worth of gifts to three people, you don’t have to fill out any additional tax forms. However, if you give two people $10,000 worth of gifts and one person $20,000 worth of gifts, you would need to file a gift tax return for the $20,000 gift using IRS Form 709. If you are married, and you and your spouse are giving away property that you jointly own, the annual exclusion doubles to $30,000. In addition to the annual exclusion, every person has a lifetime gift exclusion, which is currently a whopping $11.18 million due to the 2017 Tax Cuts and Jobs Act. Any gifts you give that exceed the $15,000 annual exclusion count toward your lifetime exclusion, and you only have to pay taxes on gifts that go over your annual exclusion once your lifetime exclusion runs out.

Gift tax exemptions

In addition to the annual exclusion, there are a few situations where your gift can be completely exempt from the gift tax. First, any gifts given between spouses are not subject to the gift tax, no matter their value. Second, gifts made to pay for someone’s education or medical care directly, meaning you pay your gift straight to the school or care facility, are covered by the educational and medical exclusions, respectively. Third, gifts made to a political organization for its own use are exempt from the gift tax. Finally, gifts made to a charity are similarly exempt.

Besides exemptions, there’s a special rule for gifts made to 529 education savings plans. If you make a large lump sum contribution to someone else’s 529 plan, you can elect to spread that gift over five years for tax purposes. For instance, if you contribute $50,000 to a 529 plan for a loved one, you can choose to count that gift as five $10,000 gifts distributed over the next five years. This unfortunately doesn’t extend to other kinds of savings accounts — though making the first deposit for a high-yield savings account can still make a great gift for a younger family member.

Loans as gifts

Maybe instead of giving someone a big gift, you’re thinking of giving them a large, interest-free loan to help them out. Well, that counts as a gift to the IRS as well. Loans above $10,000 with no or low interest rates can be subject to the gift tax, where the value of the gift is the value of the interest you aren’t charging. Each month, the IRS determines the applicable federal rates (AFR), which are the minimum amount of interest the IRS says you should charge for a loan. There are three different AFRs: short-term is for loans that last for three years or less, mid-term is those lasting three to nine years and long-term is loans of more than nine years. If you charge someone below the AFR on a loan, the interest money you miss out on is considered a gift to that person. To give an example, if you grant your nephew a $20,000 loan with a five-year term and a 0% interest rate, and the AFR is 2% annually for mid-term loans, that loan counts as a $400 gift to your nephew each year for the duration of the loan. Essentially, you are gifting him that $400 each year in the form of a waived 2% interest fee.

Additionally, the agreement you make must be legal and enforceable to count as a loan, which means you must have a signed written document with the loan amount, interest rate, repayment terms and any collateral involved clearly stated. Otherwise, the IRS may think you’re trying to dodge taxes by falsely calling a monetary transfer a loan when it’s really a gift. Also, if you later cancel someone’s debt to you, the amount of money they still owed you counts as a gift for the current tax year. If you lend someone a substantial amount of money, you’ll want to keep very good records for both the initial loan and any changes you make to the terms of the loan later. In addition to setting clear parameters, which can help keep your relationships from getting strained over money, it will make reporting gifts to the IRS much easier.

Accurately reporting your gifts to the IRS can save you from tax trouble after the holidays, and it probably won’t cost you anything extra to do so. For more tips on handling your finances during the holiday season, follow our personal finance blog.