2-Minute Money Manager: Can Gifting Lower My Taxes?

2-Minute Money Manager: Can Gifting Lower My Taxes?
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Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about income taxes; specifically, whether gifting is a good method for lowering such taxes.

Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.

You also can learn how to send in a question of your own below.

For more information, check out “Beware These 9 Common and Costly Tax Mistakes” and “6 Missteps That Will Get You Audited.” You can also go to the search at the top of this page, put in the word “taxes” and find plenty of information on just about everything relating to this topic.

And if you need anything from help with tax debt to a mortgage, be sure and visit our Solutions Center.

Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.

Today’s question comes from Lizette:

I am expecting a large sum of back pay from my job. I have already maxed out my 457(b) and Roth IRA. Is there anything else I can do to help alleviate some of the tax burden? Would gifting some of that money to family members help?

Two types of taxes: income and estate

As we all know, there are many varieties of taxes: income, sales, property, estate, etc. So, it’s easy to confuse them, especially when some seem to overlap. And that’s the case when it comes to gifting.

Gifts to qualified nonprofit organizations are deductible; in other words, they reduce the income you’re taxed on. However, contributions to charity are only available to those who itemize their deductions on a Schedule A, something most people no longer do.

The most recent changes in the tax law gave single filers who don’t itemize an automatic $12,000 standard deduction and joint filers a $24,000 standard deduction. Unless your itemized deductions exceed the amount of the standard deduction, itemizing won’t do you any good.

Even so, giving to charity can theoretically lower your income taxes. But that’s not what Lizette asked. She asked if gifting money to her family members would help lower her taxes.

Answer? Nope. Giving to anyone other than registered charities has no effect on your income taxes.

But gifting to individuals can affect another type of tax: estate taxes.

Estate taxes and gifting

Estate taxes, sometimes called death taxes, are the taxes your estate pays after you die.

While some individual states also have estate taxes, you have to have serious coin to worry about federal estate taxes. In 2019, you only pay federal estate taxes if the value of what you leave behind exceeds $11.4 million in 2019 for singles, or $22.8 million for couples. This is called the estate tax exclusion.

The Tax Policy Center estimated that in 2018, fewer than 2,000 families would have a taxable estate: That’s less than 0.1% of the 2.7 million people who were expected to die that year.

But let’s say you’re lucky enough to be in that 0.1%. What can you do? Well, one thing you can do is try to whittle your estate down before you meet your maker. How? By gifting.

You can gift up to $15,000 to as many people as you want every year without impacting that $11.4 million or $22.8 million estate tax exclusion. So, what a lot of rich folks do is try to drain their estate while they’re still alive by gifting to family members, friends or charities — the latter of which, as we learned above, could also give them an income tax deduction.

Revisiting Lizette’s question, “Would gifting some of that money to family members help?” Answer: Sure, if the goal is to reduce your estate. But reducing your income taxes? Not so much.

Other ways to reduce taxes

So, now that we know that gifting won’t help Lizette, what will?

There are plenty of articles on Money Talks News that can help you save on taxes: Just go to the top of any page and search the word “taxes,” and you can read till the cows come home. For example, check out articles like “5 Last-Minute Tax Filing Tips to Save You Money” and “Did You Miss These 7 Tax Credits and Deductions?”

But don’t expect miracles. Other than retirement accounts — which Lizette has already explored — there’s not a ton you can do.

That being said, if you’re eligible for a health savings account, fund one. If you can put money in a flexible spending account — either for health care or child care expenses — do it. There are still some nice credits out there for alternative energy equipment, like solar.

And there are longer-term things you can do. Opening a business can offer tax breaks. So can investing in real estate.

Bottom line? When it comes to making life less taxing, where’s there’s a will, there’s a way. So you should definitely read all about it.

I hope that answers your question, Lizette. See you all next time!

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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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