Don't Get Caught Off Guard: Gift Tax Rules Explained
In 2023, the annual gift tax exemption is $17,000, meaning a person can give up $17,000 to as many people as he or she wants without having to pay any taxes on the gifts. For example, a man could give $17,000 to each of his 10 grandchildren this year with no gift tax implications.
But perhaps the same man chooses to give each grandchild $21,000 instead, exceeding his annual exclusion limit by $4,000 per gift. In this scenario, grandpa could potentially owe gift taxes on the $40,000 overage.
What about married couples? Each spouse may give away $17,000 tax-free. This would allow Cynthia and Joe, a married couple, to give up to $34,000 to each of their three nieces and nephews every year.
What Is the Gift Tax?
When a person gives money or property to someone other than their spouse or dependent, they may be required to pay gift tax. This federal excise starts at 18% and can reach up to 40% on certain gift amounts. The responsibility for paying the tax typically lies with the donor, not the individual receiving the gift. While recipients don’t face any immediate tax consequences, they may have to pay capital gains tax if they sell gifted property in the future.
Not all gifts are subject to this tax, though.
Certain gifts are entirely free of tax, including:
- School tuition and education payments
- Charitable donations
- Medical expenses
- Political contributions
- Gifts to spouses and dependents
The gift tax does not play a significant role in the finances of most Americans because of two key IRS provisions: the annual gift tax exclusion and lifetime exemption.
The gift tax is a federal levy on the transfer of money or property to another person when equal value is not received in return. While it may sound cumbersome, most Americans will never pay a cent in gift taxes to Uncle Sam due to several key Internal Revenue Service rules.
Lifetime Gift Tax Exemption
If a gift exceeds the 2023 annual $17,000 limit, that does not automatically trigger the gift tax. Also, for 2023, the IRS allows a person to give away up to $12.92 million in assets or property over the course of their lifetime and/or as part of their estate. If a gift exceeds the annual exclusion limit, the difference is simply subtracted from the person’s lifetime exemption limit and no taxes are owed.
Don’t Leave Gift Giving to Chance
Understanding the ins and outs of the federal gift tax can be important for the wealthy and generous. However, if an individual gift does exceed the annual exclusion, you’ll need to file a Form 706 and report the gift to the IRS.
Need help with your taxes? Give Insogna CPA a call.