What Is a Gift?
A gift is property, money, or assets that one person gives to another while receiving nothing or less than fair market value (FMV) in return. Under certain circ*mstances, the Internal Revenue Service (IRS) collects a tax on gifts. Transfers of money or property that are given freely or exchanged for less than market value may be subject to the gift tax if the donor has exceeded the annual or lifetime gift exemption.
Key Takeaways
- A gift is an offering of money or assets made by one person to another in which nothing of comparable value is given, or expected to be given, in return.
- Some gifts are tax-free for both the donor and the recipient, but certain gifts may warrant the payment of taxes.
- Gifts that are made after the donor has already surpassed the annual or lifetime gift exemption would incur taxes.
- Estate planning and other financial planning that involves the strategic giving of gifts can make it possible for an individual or couple to save on gift taxes.
How a Gift Works
A gift differs from other types of financial vehicles, such as investments and loans, because a gift, in the strict technical definition, does not involve any expectation or obligation of repayment or a profit in return.A gift in its purest sense is given as a philanthropic gesture or an act of generosity. A gift can also be given to a charitable organization so the donor can benefit from tax deductions.
In the eyes of the IRS, some gifts are tax-free for both the donor and the recipient, but certain gifts may be subject to taxes.
Gifts and Tax Considerations
A financial gift can involve specific tax implications for the parties involved, although this tends to mainly impact the person or party who provided the gift. Tax penalties or implications generally don’t apply to relatively small gifts, so you would only need to worry about a tax fee kicking in if you give a financial gift of a substantial amount.
For the 2022 tax year, the annual gift exclusion is $16,000 or less made in a single calendar year by an individual and $32,000 from a couple making a gift using money from joint resources or assets. In 2023, the annual exclusion amounts for individuals and couples increase to $17,000 and $34,000, respectively. The thresholds are applied to each person who is the recipient of a gift—meaning you could give up to $16,000 each to any number of people without tax consequences in 2022.
There is also a lifetime gift exclusion, which is an amount that you are allowed to give over the course of your life that is excluded from gift taxes. In 2022, there is a cap of $12.06 million (increasing to $12.92 in 2023) on lifetime gifting. That means the total amount of gifts given in your lifetime under those amounts are excluded from being considered by the IRS for gift taxes.
Giving an individual a gift beyond the gift tax limit in a single year means you have to fill out a gift tax form when filing your returns, but it doesn't mean you have to pay taxes—unless you've exceeded the lifetime limit.
Special Considerations
If you receive a gift, you generally aren't required to report it as income. The gift-giver is responsible for paying any tax and filing a gift tax return. Gifts of any amount to spouses or political organizations, and payments of tuition and medical expenses on behalf of others, are generally not taxable as gifts.
In the case of gifts used for medical or educational expenses, the gifts must be paid directly to the hospital, school, or other providers in order for the tax exclusion limits to be inapplicable.
Example of Gifts
An example of a gift is a wedding gift made to a newly married couple. In some cases, this may take the form of an object, such as an expensive vase or cutlery, to help the couple set up their home.
Others may prefer to hand out cash gifts by stuffing envelopes with money. As long as the fair market value of gifts, made either in cash or any other format, does not exceed $16,000 in 2022 or $17,000 in 2023, they are not required to be reported to the IRS.
Estate planning can help wealthy individuals avoid paying gift taxes. By making financial gifts strategically, it is possible for an individual or couple to bestow quite a bit of money in financial gifts without incurring a large tax bill.
Gifts can also be made in other forms. Suppose Steven's father gifts him $13 million on his 17th birthday in 2023. The gift is subject to IRS taxes because it exceeds the $12.92 million lifetime tax exemption limit.
Consider another case, where Steven's father gifts him $16,000 each year from the day he turned one and continues the practice until the age of 25. This gift does not need to be reported to the IRS because it does not exceed the $16,000 annual limit.
What Is the IRS Gift Limit for 2022 and 2023?
The 2022 annual exclusion limit for gifts is $16,000. For 2023, the limit is $17,000. This number applies to each donee. For example, in 2022 a parent may gift $16,000 to each of their three children without tax consequences.
How Do I Avoid Gift Tax?
To avoid getting taxed on gifts, it is useful to give under the annual and lifetime gift limits. In 2022, the annual limit is $16,000 and the lifetime limit is $12.06 million. In 2023, the annual limit is $17,000 and the lifetime limit is $12.92 million.
Tuition gifts, if paid directly to the school, is not considered a taxable gift. Similarly, medical expenses paid directly to the hospital do not fall under a taxable gift. Both of these can be gifted in unlimited amounts. Gifts to spouses and political organizations for their own use are also exceptions to the gift limits.
Do I Have to Declare Gifts as Income?
Broadly speaking, receivers of gifts do not declare the gift to the IRS. The giver of the gift may file the tax form if it is required. Typically, for the giver to report the gift, the amount would exceed the annual or lifetime exclusion limits.
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