Gift Tax and Exclusion

The gift tax is a federal tax on transfers of assets or money where no equal value is received in return. It’s paid by the donor if the gift exceeds a set threshold. Annual limits and lifetime exemptions can reduce the tax, and some gifts, like those for medical or educational purposes, may be excluded.

Generally, a donor (payer) pays the gift tax for gift transfers to the donee (recipient or payee). Under some special arrangements, the recipient or donee may agree to pay the IRS taxes.

This IRS Publication 559 covers estate and gift taxes; search other IRS publications or forms or learn more about estate taxes.

What Is the Gift Tax?

Any gift from one person to another is technically a taxable event if it exceeds certain thresholds for the exclusion. It is a tax on the transfer of property (cash, asset, land, etc.) in which one individual gifts the property while receiving nothing in return. This tax is applied regardless of if the donor intends it to be a gift or not, as long as it can be defined as a gift.

A gift tax return is a separate return you may need to file, meaning it is not included or part of your individual income tax return via Form 1040.

Who Pays the Gift Tax?

As the payer or giver, you are responsible for the Gift Tax as a result of giving a gift to someone. In most cases, a gift is an event in which nothing is given in return, but it can also be considered a gift if something of equal or lesser value is given in exchange.

Here are sample gift tax exclusions, exceptions, and high-level points.

1. Gifts within the annual gift tax exclusion for the tax year are generally nontaxed so most people do not need to worry about paying taxes on gifts. See the table below.
2. Tuition, educational, or medical expenses a donor or payer covers for someone are generally nontaxable. You will not owe tax on any amount paid for someone else's tuition or medical bills. The payment must be made directly to the educational or medical institution, not the person receiving the education or medical care.
3. Gifts a taxpayer makes to his or her spouse are excluded; you do not have to pay taxes on any amount given to your spouse as a gift unless they are not a United States Citizen. However, if you do give a gift to your spouse who is not a U.S. Citizen, you will pay tax if it is over the exclusion amount - refer to the table below.
4. Gifts made to any political organization for its use are considered gifts, not deductible charitable contributions, and you may exclude any amount given to political organizations. The organization must use the money for its purposes and may not act as an intermediary to dispense the funds to a third party.
5. Gifts to qualifying charities are deductible from the value of the gift(s) made and are not subject to the Gift Tax. Charitable contributions made to qualifying charities are not only deductible on itemized tax returns, but you may also deduct the value of your charitable donations from the amount of Gift Taxes you owe.
6. Find out the gift tax regulations by state.

Do I Pay Taxes on a Gift?

Can my parents give me a sum of money as a gift? Is a $5,000 graduation gift taxable? Is there a limit on how much money I can give as a gift?

When you give someone a gift of money or property, you may owe a Gift Tax. As the one who gives the gift, you are usually responsible for paying the gift tax. A taxable gift is a transfer of any money or property to another person without expecting full compensation or repayment of at least equal value. Reduced-interest or interest-free loans may be considered gifts for tax purposes.

Here are four factors you need to know if you are giving money or property to someone: 

1. If you give someone a gift or gifts of money or property and the value exceeds the annual gift exclusion amount, you will generally owe gift taxes.
2. If you give a gift of property, taxes must be paid on the item's fair market value (not the purchase price nor the original value).
3. You do not have to pay tax on gifts totaling less than (or equal to) the annual exclusion amount.
4. You do not have to pay tax on gifts that qualify for other exclusions (see below).

How Do I Avoid Gift Taxes?

You may give someone up to the exclusion amount below in gifts before paying any gift tax. The annual gift exclusion limits nontaxable gifts per person and you can give multiple people up to the annual limit each without incurring any tax liability. If you give over your lifetime limit at any point, you will start owing tax.

You can give a gift over multiple years to avoid taxation if it is under the annual limit. For example, if you wanted to give a gift of $50,000, you could pay taxes on most of it if you gave this in one year. However, you would not owe tax if you spread this out over four or more years in separate, smaller payments.

The table below is organized by year to show the comparison between the annual exclusion, the lifetime exclusion, and the exclusion for a gift one spouse makes to their spouse who is a non-U.S. citizen.

The lifetime Gift Tax exclusion is directly related to the lifetime Estate Tax exclusion. Note that the amounts for each exclusion are doubled for married filing jointly couples.

How Does Gift Splitting Work?

Gift splitting is a strategy that allows married couples to combine their individual annual gift tax exclusions, effectively doubling the amount they can gift each year without incurring gift tax. For example, if the annual exclusion is $18,000, a married couple can gift up to $36,000 per recipient per year without triggering the gift tax.

To utilize gift splitting, both spouses must agree to split the gift and file a gift tax return (Form 709). Each spouse must consent to treat the gift as if it were made half by each of them. This process is typically used to maximize the amount of money or assets that can be transferred to recipients without exceeding the annual exclusion limits.

When to File, Pay Gift Taxes?

When to File a Gift Tax Return: A gift tax return must be filed if you give a gift that exceeds the annual exclusion amount to any individual in a given year or if you choose to split gifts with your spouse. Even if no tax is owed, filing is necessary to report the gift and utilize the lifetime exemption.

Forms and Documentation Needed: To report gifts, you need to complete Form 709, which includes details about the gifts, the recipients, and any applicable deductions or exclusions. Documentation should include the fair market value of the gifts and any relevant appraisals or valuations. Accurate records are crucial for tracking lifetime gifts and calculating any potential tax liability.

What Is the Gift Tax Rate?

Applicable Tax Rates: Gift tax rates are progressive, meaning the rate increases with the value of the gift. As of the 2023 tax year, the rate ranges from 18% to 40%. The rate applies to any taxable amount above the combined annual exclusion and lifetime exemption limits.

• Up to $10,000: 18%
• Over $10,000 to $20,000: 20%
• Over $20,000 to $40,000: 22%
• Over $40,000 to $60,000: 24%
• Over $60,000 to $80,000: 26%
• Over $80,000 to $100,000: 28%
• Over $100,000 to $150,000: 30%
• Over $150,000 to $250,000: 32%
• Over $250,000 to $500,000: 34%
• Over $500,000 to $750,000: 37%
• $750,000 to $1,000,000: 39%
• Over $1,000,000: 40%.

How the Tax Is Calculated: To calculate the gift tax, first determine the value of the gift that exceeds the annual exclusion amount. Subtract the annual exclusion from the total gift amount to find the taxable portion. This amount is then subject to the gift tax rates. If the total amount of taxable gifts over a lifetime exceeds the lifetime exemption, the excess is taxed at the applicable rate.

Are There Ways to Minimize Gift Tax?

Effective gift tax planning involves several strategies:

• Utilize Annual Exclusions: Gift up to the annual exclusion amount each year to minimize the taxable amount. Consider making gifts early to benefit from the annual exclusion and reduce the value of your taxable estate.
• Leverage Lifetime Exemption: Use your lifetime exemption strategically to transfer larger amounts over time without incurring tax.
• Make Use of Exemptions: Gifts made for qualified educational and medical expenses are exempt from gift tax.

Long-Term Planning Tips: Work with financial and estate planning professionals to develop a comprehensive strategy that considers both current and future financial goals. Regularly review and adjust your plan based on changes in tax laws and personal circumstances.

More Helpful Resources

• Plan or calculate your next tax return.
• Although gifts to your spouse are nontaxable, gifts to your dependents may be taxable if over the exemption. See more details on dependents and taxes.
• Compare taxable and nontaxable income.
• Review gift taxes and how they relate to business expenses.

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