What Is a Gift Tax?
A gift tax is a federal tax imposed by the Internal Revenue Service (IRS) on individual taxpayers who transfer property to someone else without receiving anything of substantial value in return. Gifts include cash, real estate, and other forms of property. The IRS limits how much you can transfer to someone as a gift. Any amount over this threshold must be reported and applied toward a lifetime gift tax exemption. Once you exceed this limit, the gift tax becomes payable. The gift tax can be imposed even if you never intended the transfer to be a gift.
- The gift tax is a federal tax levied on a taxpayer who gives money or property to someone else.
- A gift is anything of substantial value, such as cash and real estate, for which the donor doesn't get anything substantial in return.
- The IRS sets limits on how much taxpayers can gift to others annually and over their lifetime without incurring the gift tax.
- All gifts must be reported regardless of whether they trigger the gift tax.
- Gift splitting and gifts given in trust are two strategies to avoid incurring the gift tax.
How a Gift Tax Works
A gift is anything of value that is transferred from one individual to another. According to the IRS, the transfer may occur "either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return." In order to prevent people from avoiding paying income taxes, the federal government created the federal gift tax. This tax prevents undue hardship and obliges donors and recipients to honor their tax liability to the IRS.
Property is considered a gift if it has value and is transferred to another individual without any significant form of compensation. The following table shows what is considered a gift and what may not be, according to the IRS:
|Gifts vs. Non-Gifts|
|Included as a Gift||Excluded from Gifts|
|Cash||Educational expenses for someone else|
|Securities, such as stocks and bonds||Medical expenses for someone else|
|Real estate and vehicles||Gifts to a spouse|
|Art||Gifts and donations to political organizations|
The IRS sets limits to how much people can gift annually and during their lifetime. The annual limit is $16,000 per individual in 2022 and $17,000 per individual in 2023 without being taxed. The lifetime limit is $12.06 million for 2022 and $12.92 million for 2023. So if you have three children, you can transfer as much as $17,000 per child in 2023 for a total of $51,000 tax-free. You are taxed if you go over your annual exclusion limit and that amount counts toward your lifetime limit.
As a donor, you are responsible for reporting any gifts you make by filling out Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return even if the gift falls under the annual limit. This form must be attached to your annual tax return by April 15 of the year after the gift was made. Keep in mind that you won't be liable to pay tax on it.
Gift tax rates are based on the size of the taxable gift and can range between 18% and 40%. In cases where the value is not immediately evident, such as art or stocks, you must use the fair market value (FMV) of the asset to assess your tax liability.
You can gift an unlimited amount tax-free if your spouse is a U.S. citizen. If the spouse is not a U.S. citizen, then tax-free gifts are limited to an annually adjusted value—$164,000 in 2022 and $175,000 in 2023.
Gift Tax Strategies
There are strategies for avoiding or minimizing the gift tax. We've listed some of the key ways to avoid this tax below.
Being married allows you to double your gifts. Remember, the annual exclusion applies to the amount of gift that an individual can give someone else. This means that even if they file a joint tax return, spouses can each give $16,000 in 2022 or $17,000 in 2023 to the same recipient. This effectively raises that gift to $32,000/$34,000 in a year without triggering the gift tax.
This strategy is known as gift splitting and enables wealthy couples to give substantial annual gifts to children, grandchildren, and others. This gift can be on top of, say, tuition paid directly to a grandchild’s school or college, which is exempted outright from the gift tax.
Gift in Trust
The gift tax exclusion usually doesn’t apply to money distributed by trusts. But donors can give gifts in excess of the annual exclusion without paying taxes by establishing a special type of trust to receive and distribute the funds. The Crummey trust is the usual arrangement.
This type of trust allows the beneficiary to withdraw the assets within a limited time period—say, 90 days or six months. This gives the beneficiary what the IRS calls a present interest in the trust—and this sort of distribution can qualify as a nontaxable gift. Of course, the recipient can only take out a sum equal to the gift given to the trust.
You can gift more than the annual exclusion without reducing your lifetime gift tax exemption under certain 529 college savings plan contributions. In these cases, you report this single large gift as being spread over five years on your tax return and file the form each year. The only catch is that you can’t make any additional gifts to the same recipient during this period. If you do, then it will be applied to your lifetime exclusion.
Examples of the Gift Tax
Here are a couple of examples of how the gift tax works.
Let's say Taxpayer A gave $100,000 to five individuals in 2022—$20,000 to each. Because the annual exclusion limit is $16,000 per person, $20,000 of the total amount given is not excluded and reduces the lifetime exemption amount. So, after making these gifts, Taxpayer A has $12.04 million remaining of the exemption to give before paying gift taxes.
Here's another example. In 2022, a grandmother who wants to encourage her granddaughter’s education paid $20,000 for a year’s tuition. That same year, she also gave the young woman $16,000 for books, supplies, and equipment. Neither payment is reportable for gift tax purposes—the tuition is excluded outright, and the $16,000 is the maximum allowed under the annual exclusion.
If Grandma sent the future physician $30,000 and the young woman already paid the school, then the grandmother would have made a reportable (but not taxable) gift of $14,000 ($30,000 less the annual exclusion of $16,000), which would reduce her $12.06 million lifetime exclusion by $16,000.
How Much Is the Gift Tax?
The gift tax is applied on a sliding scale, depending on the size of the gift. It only kicks in on gifts above and beyond a certain threshold established by the IRS. First, a flat amount is assessed; additional tax is then levied at a rate that ranges from 18% to 40%.
How Much Can I Gift Someone Tax-Free?
You can give someone up to $16,000 for the 2022 tax year and $17,000 for the 2023 tax year. Anything above those amounts will eat into your lifetime gift allowance ($12.06 million in 2022 and $12.92 million in 2023), which, if exhausted, will trigger the gift tax.
Does the Receiver of a Gift Pay Tax?
The person receiving a gift usually is not required to pay gift tax. The recipient can opt to do so, though, especially if the amount would put the donor over their lifetime gift tax exclusion.
How Much Can I Gift My Child?
You can gift your child or grandchild the same amount that you can gift other relatives or friends without incurring the gift tax, namely:
- $16,000 in 2022 and $17,000 in 2023 per recipient
- $12.06 million in 2022 and $12.92 million in 2023 over the course of your lifetime
The IRS regularly adjusts these maximums for inflation. Since the $16,000 and $17,000 thresholds apply to one donor, a married couple can each give that amount to the same child, resulting in an annual gift of $32,000 and $34,000, respectively.
The Bottom Line
The gift tax is a federal levy that applies when you give to another individual or individuals, without charge, a sum of cash or assets—either tangible or intangible—that have intrinsic worth. It is imposed on the donor rather than on the receiver.
However, the gift tax has been devised in such a way that very few people end up actually paying it. Numerous types of gifts are exempted, including anything to a spouse. In addition, you can give an eight-figure sum over the course of your life before the gift tax is triggered—and even then, it applies to the amount above that threshold.
Internal Revenue Service. "Frequently Asked Questions on Gift Taxes."
Internal Revenue Service. "What's New - Estate and Gift Tax."
Internal Revenue Service. “Form 709.”
Internal Revenue Service. “Frequently Asked Questions on Gift Taxes.”
Internal Revenue Service. “Instructions for Form 706 (09/2022)."
Internal Revenue Service. "Frequently Asked Questions on Gift Taxes for Nonresidents not Citizens of the United States."
Internal Revenue Service. "Instructions for Form 709: Spouses Who Are Not U.S. Citizens."
Internal Revenue Service. "Instructions for Form 709 (2022)."
Internal Revenue Service. "Instructions for Form 709: Line B. Qualified Tuition Programs (529 Plans or Programs)."
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