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Ask Phil: Gift Taxes 

Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses gift taxes, including how they work and who is responsible for paying them. 

The government imposes gift taxes on the transfer of property, money, or assets from one person to another without receiving something of equal value in return. These taxes are typically levied to prevent individuals from avoiding estate taxes by giving away their assets before they pass away. 

The person responsible for paying gift taxes is generally the person making the gift (the donor), not the person receiving the gift (the donee). In 2023, you can give up to $17,000 each year to as many people as you want without incurring gift tax. Gifts within this annual exclusion amount do not require you to report or pay gift tax. 

In addition, the lifetime gift tax exemption allows you to make larger gifts without paying gift tax. However, once you exceed this exemption, you’ll be required to pay gift taxes on the excess amount. As of 2023, the lifetime gift tax exemption is about $13 million per person. 

Once you reach either of these thresholds, a giver will be responsible for paying gift taxes. This tax can range from 18% to 40% depending on the taxable amount. In addition, if you give over the current $17,000 limit, you will need to file a gift tax return. This r formally known as the United States Gift (and Generation-Skipping Transfer) Tax Return.  

Given these thresholds, it can be fairly simple to avoid the gift tax. However, certain actions can trigger the gift tax. These include unpaid loans to friends and family or excess contributions to a 529 savings plan.  Be sure to speak with a knowledgeable tax professional if you’re unsure about how to properly gift your assets.

If You Need Tax Help, Contact Us Today for a Free Consultation 

GoFundMe: How are Donations Taxed?

gofundme: how are donations taxed?

Crowdfunding is the act of funding a project by collecting small donations from a large number of individuals, often via the internet. GoFundMe is one of the most popular crowdfunding sites that provides a fundraising platform for just about anyone. From education campaigns to medical expenses, GoFundMe makes it easy to raise and collect funds for many causes. But like many other acts that result in free money, taxes are not often considered. Here’s a breakdown of how GoFundMe donations are taxed. 

How do crowdfunding and GoFundMe work? 

Crowdfunding sites, like GoFundMe, provide a way for people to solicit donations from friends, family members, and even strangers who want to support their cause. First, you’ll need to set up a campaign page with a title and description of your cause. You’ll also set a fundraising goal. Once your page is set up, you can share it with others through social media, email, and other channels. People who visit your campaign page can make donations directly through the GoFundMe platform. They do this by using their credit or debit cards, and sometimes third-party payment apps, like PayPal. Once you start receiving donations, you can withdraw the funds from your campaign, less any fees that the site charges.  

Is crowdfunded money taxed? 

The big question everyone wants to know is “Are these donations taxed?” Typically, donations are considered nontaxable gifts in the IRS’s eyes. However, there are a couple of exceptions that can cause the IRS to consider your crowdfunded money taxable income.  

Crowdfunded money is taxable if your donors received something in return for their donations 

If you offer something of value in exchange for a donation, this transaction could instead be viewed as a sale. Since profits from sales are taxed as income, the IRS would view the “donation” as taxable. 

Crowdfunded money is taxable if an employer sets up the fund for their employee 

In this scenario, because the fund was set up by an employer, it is considered additional income. This basically means it is taxed accordingly. 

Crowdfunded money is taxable if someone organized the fund on behalf of someone else but does not give the funded money to them 

In this scenario, the fund would be considered taxable income and would be added to the organizer’s gross income.  

Of course, if you are crowdfunding for a business venture, instead of a personal cause like help with funeral expenses, the answer to this question can become very complicated. Consulting a tax professional is your best option if you are attempting to crowdfund for a business venture. 

How do taxes on donations work? 

What if you’re on the other side of the screen and you are the one making the donations? One key thing to remember is the IRS does not allow you to deduct crowdfunded contributions during tax time. In order to deduct donations, you have to deliver it to a qualified 501(c)3 organization. That said, most GoFundMe pages do not qualify.  However, there is one more tax obligation to keep in mind if you donate large sums of money via crowdfunding. That is the federal gift tax.

The gift tax is a federal levy on gifts over a certain value. Gifts can include money, property, art, vehicles, and more. In 2023, the federal gift tax cap is $17,000. This means you can give a single person up to $17,000 without having to report it to the IRS. If you exceed the limit, you’ll need to file a federal gift tax return via IRS Form 709. However, just because you file this return doesn’t necessarily mean you’ll owe taxes on the gift. You technically won’t owe taxes until you’ve exhausted the lifetime exemption amount, which is $12.92 million in 2023. If and when you finally exhaust the lifetime limit, you’ll be subject to a gift tax rate from 18% to 40%, depending on how much you gifted. 

Tax Help for Crowdfund Donors 

The important thing to keep in mind here is that there are responsibilities on both sides of the aisle, whether you are the organizer of a crowdfunding campaign or a donor. If you are the organizer, always make sure to use the platform responsibly and transparently. Provide accurate information to donors about how their contributions will be used. If you are a donor, stay below the annual gift tax limit as often as possible. When you can’t, or when you finally exhaust the lifetime limit, make all the necessary tax filings and payments. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations. 

If You Need Tax Help, Contact Us Today for a Free Consultation