Imagine your child is getting married and you want to help finance the wedding. You’ve been saving for years and now have $30,000 set aside for the big day, which you’d like to give in the form of a check.
However, before passing on that much money, it’s important to understand the potential tax implications of a $30,000 gift. For a gift of this size, you may be required to pay federal gift tax, which can be as high as 40%. The good news is that you may be able to avoid paying gift taxes altogether, but there are reporting requirements and other restrictions you should be aware of. Consult a financial advisor to minimize your gift tax obligations.
Federal gift tax at a glance
The federal gift tax applies when you transfer money or property to another person without receiving anything of equal value in return. The gift tax rates are between 18% and 40% depending on the size of the gift.
However, not all gifts trigger this federal tax. The IRS allows you to gift up to $17,000 ($34,000 for married couples) per year to each person without incurring taxes on the gift. This is called the annual exclusion and will increase to $18,000 per person in 2024.
However, gifts that exceed this annual allowance are not necessarily subject to tax. Instead, they reduce the amount of money or property you can give away tax-free over your lifetime. This lifetime limit is called the basic exclusion amount or lifetime exemption and is adjusted each year for inflation.
The gift tax only applies once you have exhausted your lifetime exemption amount. In 2023, a person can give away up to $12.92 million over their lifetime without triggering the gift tax (this will rise to $13.61 million in 2024). For example, if someone gave away $13 million, they would only pay gift tax on $80,000. And if you need additional help planning larger gifts, consider working with a financial advisor.
How gift tax might affect a $30,000 wedding gift
If you want to give a child $30,000 to finance a wedding, there are several ways to structure it.
Because it is a gift from you alone to your child, a $30,000 wedding gift alone would avoid most tax obligations. The gift exceeds the annual exemption amount of $17,000 for 2023 by only $13,000. So that’s everything that could potentially be taxable if you’re single.
If this is your first time exceeding the annual exclusion, there’s more good news. In this case, the $13,000 deductible would simply reduce your $12.92 million lifetime exclusion by that amount. You actually wouldn’t have to pay gift tax unless you exceed the remaining lifetime exemption amount, but you still have to fill out Form 709.
Alternatively, you could give $15,000 each to both your child and his or her future spouse, thereby avoiding the annual exclusion amount (remember, you can donate up to the annual exclusion amount per year). per person).
To ensure you are structuring your gifts in your best interest, discuss this with a financial advisor.
How to avoid gift tax on a $30,000 wedding gift
But what if you are quite rich and have already exceeded your life limit? If it looks like you might owe taxes on your $30,000 wedding gift, there are a few more ways you might be able to avoid it:
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Gift splitting with your spouse: If you are married, you and your spouse can agree to split the gift on your tax return. This would allow you to earn $17,000 each in gifts (in 2023) without exceeding the annual exclusion. This way, you could gift your child up to $34,000 tax-free.
Limits and risks of avoiding gift tax
Although there are a number of ways to legally avoid paying gift tax, there are still requirements and risks to consider. Some of them are:
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Correct reporting: Gift amounts over $17,000 must be reported to the IRS on Form 709 to track the lifetime exclusion. Failure to file Form 709 may result in penalties.
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Mutual consent: Dividing gifts requires the consent of both spouses and the filing of Form 709. Failure to demonstrate mutual consent may also result in IRS penalties. If you live in one of the nine community property states, other considerations may come into play when dividing gifts.
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Lifetime limits will decrease in 2026. The Tax Cuts and Jobs Act (TCJA) doubled the lifetime gift and estate tax exemption limit for single filers in 2018. However, starting in 2016, this generous cap will revert to pre-2018 levels (adjusted for inflation). Remember, a financial advisor can help you navigate and interpret tax law changes.
Bottom line
Most people can avoid paying federal gift taxes if they donate $30,000 to a child’s wedding. This is because of the generous lifetime exclusion gifts. However, you must still properly report gifts that exceed the annual exclusion amount on your tax return. For 2023, this amount is $17,000. In 2024, the exclusion amount increases to $18,000. For taxpayers whose gifts may exceed the lifetime tax-free exclusion amount of $12.92 million, gift splitting and other strategies may provide a way to fund a wedding without incurring taxes.
Tax planning tips
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If you are thinking about making a large financial gift, contact a financial advisor to discuss how it might affect your taxes and estate plan. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three verified financial advisors working in your region, and you can have a free discovery call with your matching advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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As tax season approaches, SmartAsset’s federal income tax calculator can tell you how much you may owe in federal, state and local income taxes the next time you file.
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