And since annual donations reduce the size of your estate, they also reduce your heirs' potential tax liability. The general rule is that any donation is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable.
The good news is that the wealth tax exemption is a lifetime exemption that can also be used for gifts. Every dollar you give as a gift today will only reduce the amount you can transfer tax-free at the time of your death. In addition, even taxable donations can result in a tax liability on gifts thanks to the unified credit (explained below). Some gift recipients will be happy to keep a gift from you that can help them feel more confident about surviving economic setbacks.
Do the above and you'll need to fill out a gift tax form when you file your returns, but you may still avoid having to pay any gift taxes. Submitting the form doesn't necessarily mean that you have to pay anything for the gift, it's just the form you'll have to use to declare the gift. Now, let's really look at the details of the gift tax, the annual exclusion, and other taxes you should consider when donating money to family members. But, generally speaking, this should not apply to a cash gift in the same way as it would apply to the donation of stocks or real estate.
If you donate cash, there are generally no income tax consequences for the recipient, although they could have gift and inheritance tax implications for the donor. The bad news is that you'll need to file a gift tax return, but the good news is that you probably won't pay a gift tax. If you're married, a gift made over a year can be considered divided between you and your spouse, even if only one of you hands over the cash or property of the gift. And as a person receiving a gift, you won't be charged any tax on the gift unless you decide to sell it later.
This means that if you gave money to a child you're not related to, you'll still have to pay gift tax if you gave the person any amount that exceeds your exclusion threshold. You can't deduct the value of any donations you make (except for donations that are deductible charitable contributions). If the only donations made during a year are excluded this way, there is no need to file a federal gift tax return. The IRS gift tax isn't the only type of tax you should consider when donating money to family members.
And remember that any individual gift amount that exceeds your annual exclusion limit reduces your exclusion from lifetime gift tax.