Tax consequences of cash gifts

Tax deduction for giving cash 💵?

It depends on the recipient.

The tax treatment of cash gifts falls into one of three buckets. Understand these rules to avoid creating unintended tax problems.

1. A gift to a 501c3 charitable organization 🏘️ will likely be eligible for a charitable contribution deduction. You’ll have to meet a few tests to take this deduction, primarily itemizing your personal tax deductions rather than claiming the standard deduction.

2. If you have a business 👔 and make a gift to an employee, it will likely be considered a tax deduction for the business. Unfortunately, this is NOT because gifts to employees are inherently tax-deductible, but INSTEAD because gifts to employee are considered taxable compensation to the employee. There are some exceptions, but by and large, a gift to an employee is taxable income to them reported on their W2 as additional wages.

3. Gifts to friends and family. 💕 This is where I see folks often get confused. They think there’s a income tax deduction for giving money to people they love. False. Not only is there NO income tax deduction for this, you may actually have to FILE A TAX RETURN 🧾 and even PAY TAX 💸 because of this gift.

How can this be?

First, we need to understand the concept of “estate taxes”. The federal government taxes the value of a person’s estate when they die. The estate tax doesn’t apply to the estate’s ENTIRE value, only to the value ABOVE a certain threshold that changes annually. For 2022, the federal estate tax threshold is around $12 million dollars.

If you think your estate might be valued over $12 million dollars and you want to minimize estate taxes, what might you do? The most obvious answer 💡 is to give enough assets away while you’re still alive so your estate won’t pay this tax.

That’s where filing a tax return for gifts comes in.

Knowing that folks would get around the estate tax simply by making gifts to friends & family during life, the estate tax and gift tax rules are “unified”. This means that the $12 million dollar threshold not only covers the value of your estate when you die, but ALSO lifetime gifts. Which is why the IRS expects you to file a gift tax return for any year you’ve made cash gifts to friends or family. Further, if your cumulative lifetime gifts exceed the unified threshold, you may owe tax on current year gifts.

You do get an exception. Each year, you’re allowed a cash gift up to a certain amount per recipient before needing to file a gift tax return. For 2022, that amount is $16,000. For 2023, it’s $17,000.

Important ‼️

When we say “cash”, we don’t only mean literal paper dollars, but also credit cards, gift cards, Venmo, Zelle, Cashapp, a check, etc. Anything that functions like cash in this context. You can’t get out of these rules simply by giving a gift card instead of writing a check.