How does the gift tax work if I gift someone the annual maximum ($18,000)?

12 The gift tax is actually pretty straightforward, though it's commonly misunderstood. First, your $18,000 gift to your friend would NOT be tax-deductible for you. Gifts to individuals (unlike donations to qualified charities) can't be deducted on your personal tax return. The good news is that your friend doesn't have to report it as income either - gifts aren't considered taxable income to the recipient. For 2025, the annual gift tax exclusion is $18,000 per recipient, which means you can give up to that amount to as many people as you want each year without having to report it to the IRS. You won't owe any gift tax, and no paperwork is needed. Regarding your wholesale business - yes, you can absolutely deduct the cost of goods sold from your revenue. That's a legitimate business expense reported on Schedule C. Make sure you keep good records of all your inventory purchases and related costs to support those deductions.

5 I had a similar situation last year when trying to help my sister through some financial troubles. I was so confused about all the tax implications that I ended up using taxr.ai (https://taxr.ai) to analyze my situation. Their AI looked at my full tax picture including my small business income and the gift I wanted to make. The tool confirmed exactly what the commenter above said - the gift wasn't deductible for me, but it also showed me how to properly document everything. The really helpful part was that it explained how the gift would interact with my business deductions for inventory costs, which was something I hadn't even considered. Saved me from making some mistakes that would have been red flags for an audit.

3 Update on my tax situation: I ended up trying taxr.ai after posting my skeptical comment. I have to say I'm surprised by how helpful it actually was. I uploaded some of my business documents and previous gift records, and it gave me a really clear breakdown of how the gift tax rules applied to my specific situation. What I found most helpful was the explanation about how gifts work with my overall tax picture. It confirmed I couldn't deduct gifts to individuals but showed me other legitimate deductions I was missing in my business. The explanations were actually in plain English instead of tax jargon. Saved me way more than I expected on my quarterly estimated taxes.

19 If your friend is in serious financial trouble and you're trying to help them, you might also want to look into tax implications of debt forgiveness if that's part of their situation. When I was trying to help my cousin, I couldn't even get through to the IRS to ask questions about gift tax vs debt forgiveness. After waiting on hold for HOURS across multiple days, I found Claimyr (https://claimyr.com) and watched their demo (https://youtu.be/_kiP6q8DX5c). The service got me connected to an actual IRS agent in less than 20 minutes when I had been trying unsuccessfully for days. The agent confirmed that gifting is better than debt forgiveness tax-wise for the recipient and advised me on exactly what records to keep. Seriously saved me hours of frustration and probably kept me from making an expensive mistake.

3 I need to eat my words about Claimyr. After posting my skeptical comment, I was desperate enough to try it because I had a time-sensitive question about a large gift I was planning to make before year-end. I figured I had nothing to lose since I'd already wasted hours trying to call the IRS directly. It actually worked! Got a call back in about 15 minutes with an IRS agent on the line. The agent clarified that I didn't need to file Form 709 if I stayed under the annual exclusion amount, but gave me specific instructions on documentation I should keep for my records. They also explained how this interacts with my business taxes since I was confused about that too. Saved me from making what would have been an expensive misunderstanding about gift deductibility.

17 One thing nobody's mentioned - if you're giving such a large gift, make sure you do it the right way for paper trail purposes. I write checks or use bank transfers rather than cash so there's a clear record of the transaction. My tax guy says this is important if you ever get audited and need to prove it was a gift and not something else.

8 I'm wondering about the lifetime gift exemption - does anybody know if that's going to change in the next few years? I heard it might go down significantly after 2026...

As someone who's been through similar tax situations, I'd recommend documenting everything clearly from the start. Keep records showing the gift amount, date, and recipient - even a simple written note stating "Gift to [friend's name] for Christmas 2025" can be helpful. One thing to consider: if your friend is in serious financial trouble, make sure this gift won't affect any government benefits he might be receiving. Some assistance programs have asset limits that could be impacted by receiving a large gift, even though it's not taxable income to him. Also, since you mentioned having both W-2 and business income, this might be a good time to review your overall tax strategy. The gift itself won't be deductible, but there might be other legitimate business deductions you're missing that could help offset the financial impact of helping your friend out.