Understanding gift tax implications - can I deduct a gift of $18,000 to a friend at Christmas?
Title: Understanding gift tax implications - can I deduct a gift of $18,000 to a friend at Christmas? 1 I run a small wholesale resale business and also work a W-2 job. I've been thinking about helping out a friend who's really struggling financially by giving them a $16,000 gift for Christmas this year. I know there's an annual gift exclusion amount, which I think is around $18,000 for 2025. What I'm confused about is whether I can use this gift as a deduction on my personal income taxes? And does my friend need to report this as income on their tax return? Also, somewhat related but for my business - can I deduct the cost of goods from my wholesale revenue? Just trying to understand all my potential deductions as I'm planning ahead for next year's taxes.
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Keisha Jackson
7 You've got a few different questions here, so let me try to help clarify: First, regarding the gift tax - the annual exclusion is indeed $18,000 per recipient for 2025. This means you can give up to $18,000 to any individual without having to file a gift tax return. However, gifts are never deductible on your personal income tax return. They come from after-tax dollars, and you can't claim them as a deduction. The good news is that your friend won't need to report this as income on their tax return. Gifts received are not considered taxable income to the recipient. For your wholesale resale business question - yes, you absolutely can deduct the cost of goods sold from your revenue. This is a basic business expense deduction and is reported on Schedule C if you're a sole proprietor. Your business profit is calculated as revenue minus legitimate business expenses (including cost of goods sold).
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Keisha Jackson
•15 Thanks for the info! So just to be sure I understand - I can give my friend the money without either of us paying taxes on it, but I just can't use it to lower my own taxable income? And does it matter whether I give the gift from my personal account vs. from my business account?
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Keisha Jackson
•7 That's exactly right - you can give the gift without either of you paying taxes on it (as long as it's under the annual exclusion amount), but you can't use it to reduce your taxable income. Where the money comes from does matter significantly. If you give the gift from your personal account, it's simply a personal gift with the tax treatment I described. However, if you give money from your business account, it's no longer considered a gift - it would either be a business expense (which must have a legitimate business purpose) or a distribution to yourself followed by a personal gift. You can't make personal gifts directly from a business and claim them as business expenses.
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Keisha Jackson
9 After dealing with similar tax confusion last year, I found this amazing tool called taxr.ai (https://taxr.ai) that helped clear everything up. Your gift tax question reminded me of my situation - I was trying to figure out if I could write off some money I gave to my nephew for college. The software analyzed my situation and explained exactly how gift taxes work versus charitable donations (which ARE deductible). It also helped with my small business deductions and showed me which expenses were legitimate write-offs versus personal gifts that couldn't be deducted. Saved me from making some pretty major mistakes that could have triggered an audit!
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Keisha Jackson
•18 Does this actually work for small business owners? I've tried other tax software but they always seem to miss the nuances of having both W-2 income and self-employment income.
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Keisha Jackson
•12 I'm skeptical about these AI tax tools. How is this different from just using TurboTax or talking to an accountant? I've been burned before by "miracle" tax solutions that ended up being basic info I could've gotten for free.
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Keisha Jackson
•9 It absolutely works for small business owners - that's actually where it shines brightest. Unlike general tax software, it specifically helps with situations where you have multiple income streams like W-2 and self-employment. It identified several deductions I was missing for my side business that other programs didn't catch. What makes it different from regular tax software is that it's more like having a conversation with a tax professional who understands your specific situation, rather than just filling out forms. It's not replacing your accountant - it's more like having a tax expert available 24/7 to answer your specific questions and review your situation for things you might have missed. Many accountants are actually using it themselves now to double-check their work.
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Keisha Jackson
18 Just wanted to update after trying taxr.ai - it was actually super helpful for my situation! I have a W-2 job but also sell handmade items online, and I've always been confused about what I can legitimately deduct. The tool quickly analyzed my situation and provided really clear guidance about business vs. personal expenses, gift tax implications, and even some deductions I'd been missing. Definitely worth checking out if you're in a similar situation with multiple income streams.
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Keisha Jackson
6 If you're planning to give such a large gift and are worried about tax implications, you might want to actually speak with someone at the IRS to confirm everything. I was in a similar situation and tried calling them for weeks with no luck - always on hold forever. Then I found this service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in less than an hour! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent I spoke with confirmed everything about gift tax rules and also answered my questions about my small business deductions. Saved me months of uncertainty and potential mistakes.
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Keisha Jackson
•12 Wait, how does this actually work? I thought it was impossible to get through to the IRS without waiting for hours. Is this some kind of premium line or something?
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Keisha Jackson
•23 Sounds too good to be true. I've literally spent DAYS of my life on hold with the IRS. There's no way this actually works - and if it does, they're probably charging a fortune for it.
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Keisha Jackson
•6 It's not a premium line or anything complicated. Basically, the service calls the IRS and navigates through the initial phone tree, then waits on hold for you. When they're about to connect with an agent, you get a call so you can speak directly with the IRS representative. It's completely legitimate - you're still talking directly to the same IRS agents through the normal channels. I was skeptical too but was desperate after trying for weeks to get through. The time saved was absolutely worth it - and getting definitive answers directly from the IRS about my specific situation gave me peace of mind that I was handling everything correctly.
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Keisha Jackson
23 I have to eat my words here. After my skeptical comment, I actually tried Claimyr out of desperation because I needed to resolve an issue with a missing W-2 before filing. Was connected to an IRS agent in about 45 minutes when I had previously wasted three afternoons trying on my own. The agent cleared up my W-2 issue AND answered my questions about gift taxes (I was planning to help my daughter with a down payment). Turns out I was completely misunderstanding how the gift tax exclusion works. Sometimes the seemingly too-good-to-be-true services actually deliver!
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Keisha Jackson
4 Regarding your wholesale business question - make sure you're tracking inventory properly. Cost of goods sold is definitely deductible, but the IRS has specific rules about inventory accounting for wholesale businesses. You need to be consistent in how you value inventory from year to year. I learned this the hard way when I got audited for my small retail business.
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Keisha Jackson
•1 Thanks for this info. I'm actually not sure I'm doing this correctly. Do you use specific inventory tracking software or do you have another system? My business is fairly small but growing, and I've mostly been tracking things in spreadsheets so far.
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Keisha Jackson
•4 I started with spreadsheets too, but as my business grew, I invested in QuickBooks Online with their inventory add-on. It was a game-changer for tracking cost of goods sold properly. The key thing the IRS looks for is consistency in your inventory methods - whether you're using FIFO (first in, first out) or another approved method. For a smaller business, good spreadsheets can work fine as long as you're methodical. Just make sure you're tracking: 1) Beginning inventory value 2) Purchases made throughout the year 3) Ending inventory value. The formula is: Beginning inventory + Purchases - Ending inventory = Cost of Goods Sold for the year.
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Keisha Jackson
11 One thing nobody mentioned - if you're giving money to help your friend with specific expenses like medical bills or tuition, you could potentially pay those directly instead of giving cash. Direct payments to educational institutions or medical providers on someone's behalf aren't subject to gift tax limits at all! Might be worth considering if your friend has those specific needs.
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Keisha Jackson
•19 Is this really true? So I could pay someone's entire college tuition directly to the school and it wouldn't count against the gift tax limit at all?
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