It is better to give than to receive. But if you give a gift above a certain amount, you might end up owing money to the Internal Revenue Service (IRS).
The federal tax code has very specific rules about how much you are allowed to transfer to others each year—and over the course of your lifetime—in the form of a gift. Any gifts above that amount may be subject to gift tax, which is paid by the giver. However, not every gift is subject to gift tax. There are annual exclusion amounts, a lifetime exemption amount, and other exclusions, such as education or medical exclusions, that relieve a giver of paying federal gift taxes. Because the lifetime exemption amount is very generous at this time, many people will not actually owe taxes on their gifts. However, high net worth individuals should be mindful of how gifting can affect the estate tax that may be due upon their death.
What is Considered a Gift under Gift Tax Law?
According to the IRS, a gift is a transfer of money, property, or other assets, such as real estate or stock, for which the giver does not receive “full consideration.”1 Consideration is a contractual term that means “exchange value.” Full consideration, as the IRS defines it, is fair market value. The fair market value of property such as real estate is the price that a buyer and seller, both having reasonable knowledge about the property and under no pressure to trade, would agree to on the open market.
Any exchange can be considered a gift and subject to gift tax, with the following limited exceptions:
- Tuition or medical expenses paid on behalf of another person (education exclusion and medical exclusion)
- Gifts to a political organization
- Gifts to your spouse (unlimited gifts can be exchanged between spouses without gift tax implications, assuming both spouses are US citizens)
- Gifts to qualified charities
- Gifts that do not exceed the annual exclusion amount ($16,000 in 2022) to any one recipient in any given year
What Else Should I Know about the Gift Tax?
When giving a gift to another person, here are some other tax-related points to keep in mind:
- The giver customarily pays the gift tax. In IRS terminology, the giver is known as the donor and the receiver is known as the donee. The donee can agree to pay the gift tax instead of the donor. In this case, the IRS advises that the payment should be discussed with a tax professional. In cases where the donor owes tax on the gift and does not pay it, the IRS could seize the gift or otherwise turn to the donee for tax payment, but this usually happens only if the donor is deceased.
- The annual gift tax exclusion is per recipient. The $16,000 annual gift tax exclusion is calculated per recipient. That is, you can gift up to $16,000 per person to an unlimited number of individuals in any given taxable year without triggering the gift tax. For gifts given by a married couple, the annual exclusion amount is $32,000 (twice the individual exclusion).
- There is a federal gift tax form. Gifts that exceed the annual exclusion amount could be subject to tax, depending on whether you have used up your lifetime exemption (see below). In any case, if your gift exceeds the annual exclusion amount or applies the annual exclusion to a transfer in trust, you must file Form 709 even if no gift tax is due.
For answers to common questions about gift tax issues, see this IRS resource.
How Does the Lifetime Exemption Work for Gift Taxes?
In addition to the annual gift tax exclusion, there is also a basic exclusion amount known as the lifetime exemption. The lifetime exemption is the amount you can gift across all tax years before you owe gift taxes. For 2022, the lifetime exemption is $12.06 million.
Importantly, the lifetime gift tax exemption is tied to the estate tax exemption. The gift tax exemption and the estate tax exemption are effectively treated as a single amount ($12.06 million in 2022, but subject to change in future years). Thus, over the course of a taxpayer’s life, the amount of nonexcluded gifts that they give counts against their lifetime exemption and could also affect their estate tax.
For example, let us say that a taxpayer has gifted $2 million in excess of their total annual exclusions by the time they pass away in 2022. That amount counts against their lifetime exemption, reducing the balance to $10.06 million. If their estate’s value exceeds $10.06 million, estate taxes would be due on the excess amount.
It is unlikely that most individuals will exceed the lifetime gift tax exemption. And even if they do, the tax is graduated (i.e., the tax increases in proportion to the taxable amount). Overall, the gift tax rate ranges from 18 percent for taxable amounts up to $10,000, to 40 percent for taxable amounts over $1 million.
Give Yourself the Gift of an Estate Planning Professional
Generosity is its own reward. But you owe it to yourself to make sure that your gifts are properly accounted for, the right gift tax forms are filed, and that gifting fits into your estate planning goals. An estate planning attorney can help you understand the tax implications of gifting, including the long-term estate tax implications, as well as some of the hidden costs of a gift, such as real estate taxes, transfer fees, or capital gains tax.
For guidance regarding gift taxes, estate taxes, and estate planning, contact our office to schedule an appointment.
- Frequently Asked Questions on Gift Taxes, IRS.gov, https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes (Nov. 15, 2021).