Official Guide To The Rules On Gifting
It feels good to give, but getting taxed on your generosity — not so much. While a gift tax exists at the federal level, most people don’t need to worry about it. Although the gift tax rate can be as high as 40%, most people will not end up paying that much.
Whether you’re considering gifting money to children or donating to charity, here’s what you need to know.
What is the Gift Tax?
The gift tax is a federal tax on the transfer of property from one person to another. It is designed to prevent large transfers of wealth from avoiding estate taxes. As of 2024, you can gift up to $18,000 per year to an individual without incurring gift taxes. You can give this amount to as many people as you wish. However, you cannot give more than $18,000 per year to any one person without potentially incurring taxes.
If you exceed the annual exclusion amount, any excess gifts count against your lifetime exclusion amount, which is $13.61 million in 2024. This means you likely won’t pay any gift taxes unless you give away millions of dollars.
What is Considered a Gift?
A gift is defined as the transfer of property where nothing is received in return. Gifts that may incur taxes include:
- Cash
- Real estate
- Vehicles
- Jewelry
- Artwork
- Any other item of value
Certain donations are not considered gifts, such as:
- Gifts under the annual exclusion amount
- Tuition paid directly to an educational institution
- Medical expenses paid directly to a medical facility
- Gifts to your spouse (if the spouse is a U.S. citizen)
- Gifts to political organizations
- Charitable donations
Who Pays the Gift Tax?
Generally, the person giving the gift (donor) is responsible for paying any gift taxes, not the recipient (donee). Gifts between spouses are typically exempt from gift taxes. Thanks to the annual and lifetime exclusion amounts, gift taxes are not an issue for most people.
How Gifting Impacts Different Types of Taxes
Income Tax
Gifts do not affect income tax for either the donor or the recipient. Gift taxes are considered a transfer tax rather than an income tax. The gift is not included in the taxable income of the recipient, and the donor cannot deduct the gift from their income tax return.
Estate and Gift Tax
The estate and gift tax system is unified. If a gift exceeds the annual exclusion amount, the donor must report it on a federal gift tax return (IRS Form 709). Gifts over the annual exclusion amount reduce your lifetime exclusion limit.
For example, if a donor makes a $118,000 gift in 2024, they must file a federal gift tax return to report using $100,000 of their $13.61 million estate tax exemption. No immediate tax is due, but the gift needs to be recorded.
What is the Annual Gift Tax Exclusion?
The annual gift tax exclusion is the amount you can gift to another person each year without incurring gift taxes. As of 2022, this amount is $16,000 per recipient, per year.
You can give each of your children, for example, $16,000 annually without exceeding the limit. The exclusion amount resets every year. You can also give the full $16,000 all at once or spread out throughout the year.
If you’re married, you and your spouse can collectively give $30,000 to one individual per year without incurring taxes. Gifts exceeding $16,000 to one person must be reported on a gift tax return (IRS Form 709), and any amounts reported will count against your lifetime gift tax exclusion.
Filing a gift tax return does not necessarily mean you owe taxes. If taxes are owed, they will be between 18-40% depending on the size of the gift. The purpose of Form 709 is to track gifts that exceed the annual exclusion amount.
To avoid gift taxes, stay under both the annual exclusion limit and the lifetime exclusion limit ($12.06 million in 2022). By doing so, you can give without the hassle of filing a gift tax return and potentially owing taxes.
Final Thoughts
Unless you give millions of dollars over your lifetime, you likely won’t owe gift taxes. If you exceed the exclusion limits, the gift tax rate could be as high as 40%. If you plan to give significant amounts, it's important to plan ahead for the tax implications.
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