Why "pay" someone when you can "gift" tax free?

So I just read that a gift can be up to $15,000 without being taxed. So why then do people "pay" someone for a service, when they could just claim it was done out of charity, and then just gift them $10k. As far as I understand, this is perfectly legal and would save one a ton in paying taxes?

What am I missing here?

12 Answers

  • Scott
    Lv 7
    1 month ago

    Because you can go to prison for tax evasion.

  • 1 month ago

    it has to be an actual gift.................

  • Amy
    Lv 7
    1 month ago

    Because the $15,000 limit specifically applies to money given without getting any item or service in return.  It is NOT legal to pretend a payment is a gift.

  • 1 month ago

    Gifts (of any amount) are never taxed to the recipient (nor to the giver unless huge bucks are involved in the estate taxation process).  There is no charity write-off on your schedule A for gifts to individuals. The one saving in taxes would be the worker that you paid who did not report the income on his 1040 and the IRS would not know it (at least right away) because you did not issue a 1099-misc. The fraud would be on the part of the non-reporting worker.  Tax fraud wipes out "savings" every time.  [[ The $15,000 "limit" is the maximum a giver can give per person without FILING any paperwork. ]]

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  • 1 month ago

    That's only legal if it really was a gift.  If it's in return for them doing something for you, then it's not legal.

  • danxp2
    Lv 6
    1 month ago

    You can gift away millions tax free. Over the annual limit per person requires reporting and eats away at the lifetime estate exemption but that lifetime estate exemption is at 5+ million now so it is unlikely to have any tax due. 

    People do not gift work and gift money back and forth because that is fraud. Exchange of compensation for work is income and required to be reported by law. People generally don’t want to be open to fraud and people do not want to be deposed, or commit perjury, or obstruct justice.

    Gifting money is legal, gifting money for yard work is not. That is employment and is required to be reported. Someone you gift money to will report it to try and claim the EITC, to be able to put more in their SEP plan, or another purpose. 

    There is no way to keep the string of gifts completely insular. Someone will feel the gift isn’t enough and squeal for the whistleblower payoff.

  • 1 month ago

    Because once you exchange something for the money, it is not a gift.  So no, that is not perfectly legal, it is tax evasion.

  • 1 month ago

    Because it's form over substance and will cause problems later.

  • Anonymous
    1 month ago

    1) It's not legal.  It's tax evasion.   Giving someone cash for goods/services is not a "gift".   In terms of taxes, things like "gift" and "self-employment income" have specific definitions.

    2)  Why would any merchant or service provider enter into a contract that states they will be providing their goods and services for free?  What recourse would they have if they do not receive a "gift" in exchange for the 20k new roof they put on your house?

    3)  Many expenses are tax deductible in which case the buyer/consumer reports the amount they paid said merchant/provider to the IRS.   If there is a discrepancy between what the customer and the merchant reports, the IRS will investigate.

    4)  Do you really want to live in a world where everyone pays no taxes?   I think we'd all love to pay less, but think about if everyone paid none...

  • 1 month ago

    Because when I pay you  for a service I get to expense it and deduct it from my taxes...if I gift it to you then I get no tax deduction and then I pay more taxes.  I am not paying taxes for people I do not know well want a tax break on their taxes.

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