Thanks for the question, Allan. The rules for gifting are specific and important to know before you give anything. We’ll break down the basics of the gift tax here for you. The good news is that a gift must be pretty substantial before the IRS takes notice but there are limitations to consider.
Let’s start by determining what is NOT a taxable gift.
1. When it’s given to a husband or wife who is a U.S. citizen. Special rules apply to spouses who are not U.S. citizens.
2. When it’s paid directly to an educational or medical institution for someone’s medical bills or tuition expenses. (It doesn’t have to be a child, or even a relative, for this exception.)
3. Gifts that are not more than the annual exclusion for the calendar year.
4. Gifts to a political organization for its use.
So, for your purposes, giving money to children and grandchildren could be considered taxable so you want to be aware of the limitations on amounts you give. It’s important to note here that it will be tax free for the recipient in most cases. The giver of the gift is the one who files a gift tax return and pays the tax if needed.
For 2016 and 2017, the amount you can give without needing a gift tax return is $14,000 per person. Now, keep in mind if your children or grandchildren are married, you could give their spouse that amount too if you want to give more to their
family.
So, what happens if you go over the exclusion amount? It means you must file a gift tax return but that still doesn’t mean you will necessarily owe tax.
For example, let’s say you give $20,000 this year to each of your children and grandchildren. In this scenario, you must file a gift tax return, showing the excess gift of $6,000 ($20,000 – $14,000 exclusion = $6,000).
Each year, the amount a person gives other people over the annual exclusion accumulates until it reaches the lifetime gift tax exclusion. And here is the other good news; currently, a taxpayer does not pay gift tax until they have given away over $5.45 million in their lifetime (2016). I’m not sure how much you intend to give your family members, but it's save to say that as long as it’s under $5.45 million, you don’t have to worry about the taxes just yet.
Here’s some FAQs from the IRS you might find helpful too:
Frequently Asked Questions on Gift Taxes
Hey Susan, thanks for your question! We get asked about this a lot. Let me breakdown the important points of home office deductions. This deduction is designed to allow a taxpayer to deduct expenses for the business use of his or her home. The home office deduction is available for homeowners and renters, and applies to all types of homes.
There are two tests to consider first: exclusive use and regular use.
To deduct home office expenses, you must use the area exclusively and on a regular basis, either as your principal place of business or a setting to meet or deal with clients or customers. And the office doesn’t need to be where you do all of your work. If you’re, say, a plumber or an interior designer and spend most of your time in other people’s homes, you can still write off a home office if you use it for administrative purposes like invoicing, keep the business’ books, ordering supplies, that sort of thing.
Let me break down what “exclusively” means a bit more. This means that the space is used just for work. It doesn’t need to be
an entire room, but your work area needs clear boundaries. If you work at a table in your living room, don’t claim it, it probably doesn’t qualify.
But you don’t need to use the office all day every day to meet the “regular” use test. If you have a part-time business from home and work there a couple days a week, that works. The important part is that you use the office on a constant basis, but not necessarily daily.
What if you’re an employee but do some work from home? In that case, you can claim the write-offs only if you’re working at home for the convenience of your employer. In other words, you won’t qualify if you can’t get all your work done at the office and end up bringing some home. But you will qualify if you’re an employee for a business that doesn’t have an office for you.
Keep in mind, home office expenses are pro-rated and based on the size of your home office as it relates to the home as a whole. Examples of these expenses are property insurance, mortgage interest, repairs, and utility bills. Let’s say the square footage of your home office equals 10% of your home total, then you can claim 10% of these expenses.
So now you might be asking, “how do I know the percentage of my home office?” This part requires just a bit of math (don’t
worry, with a calculator by your side, you got this).
Some people figure home office size based on the number of rooms in their home — nine rooms, for example, works out to one-ninth of pro-rated expenses. Don’t go this route, that’s not accurate. Be sure to use the actual measurements of the space.
Let’s calculate an example:
Say you have a home office that is 10 feet wide by 8 feet long. Multiply those 2 measurements to get your square footage of the space. In this case it’s 80 sq. ft. If the total square footage of the home is 3,000 square feet, then the calculation looks like this
80 divided by 3,000 x 100 = 2.67%
In this case, the homeowner or renter can claim 2.67% of their home expenses. Yes, this can get cumbersome you may not want
to do all those calculations. Let me introduce you now to the Simplified Option!
Back in 2013, the IRS came up with a simpler option for computing the business use of your home. They didn’t change the qualifications for it, but it offers a less complex and calculation heavy alternative. This simplified option can significantly reduce the record keeping burden by allowing a qualified taxpayer to multiply a prescribed rate (right now it’s $5) by the allowable square footage of the office in lieu of determining actual expenses.
Check out this link for more information on home office deductions:
https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction
Pro Tip:
Don’t pad these numbers. Over inflated numbers of this deduction especially could trigger an audit so you want to be sure you can back up exactly what you are deducting with room size, photos if needed, and your bills that prove out your calculations. But with that being said, if you have it, don’t be afraid to use it!