The gift tax is a federal levy on the transfer of money or property to another person when equal value is not received in return. While it may sound cumbersome, most Americans will never pay a cent in gift taxes to Uncle Sam due to several key Internal Revenue Service rules. However, a financial advisorcan help you determine what your tax liability may be if you plan to give money or property to another person.
What Is the Gift Tax?
When a person gives money or property to someone other than their spouse or dependent, they may be required to pay gift tax. This federal excise starts at 18% and can reach up to 40% on certain gift amounts. The responsibility for paying the tax typically lies with the donor, not the individual receiving the gift. While recipients don’t face any immediate tax consequences, they may have to pay capital gains tax if they sell gifted property in the future.
Not all gifts are subject to this tax, though. Certain gifts are entirely free of tax, including:
- School tuition and education payments
- Charitable donations
- Medical expenses
- Political contributions
- Gifts to spouses and dependents
The gift tax does not play a significant role in the finances of most Americans because of two key IRS provisions: the annual gift tax exclusion and lifetime exemption.
Annual Gift Tax Exemption
The IRS allows individuals to give away a specific amount of assets or property each year tax-free. In 2022, the annual gift tax exemption is $16,000, meaning a person can give up $16,000 to as many people as he or she wants without having to pay any taxes on the gifts. For example, a man could give $16,000 to each of his 10 grandchildren this year with no gift tax implications.
But perhaps the same man chooses to give each grandchild $20,000 instead, exceeding his annual exclusion limit by $4,000 per gift. In this scenario, grandpa could potentially owe gift taxes on the $40,000 overage, but more on that in a bit.What about married couples? Each spouse may give away $16,000 tax-free in 2022. This would allow Cynthia and Joe, a married couple, to give up to $32,000 to each of their three nieces and nephews every year.
In 2023, the annual gift tax exemption is $17,000. This means that a married couple can give $34,000 ($17,000 x 2) per recipient that year. For example, if a married couple has two children and six grandchildren they may give $272,000 in 2023 without affecting their joint $25.84 million overall tax exemption, which is the $12.92 million estate tax exemption for 2023 multiplied by two.
Lifetime Gift Tax Exemption
If a gift exceeds the 2022 annual $16,000 limit, that does not automatically trigger the gift tax. Also for 2022, the IRS allows a person to give away up to $12.06 million in assets or property over the course of their lifetime and/or as part of their estate. If a gift exceeds the annual exclusion limit, the difference is simply subtracted from the person’s lifetime exemption limit and no taxes are owed. The same is true for 2023’s $17,000 gift tax exemption and $12.92 million estate tax exemption.
Consider this example for the 2022 tax year: A woman decides to buy her granddaughter a $30,000 car as a college graduation present. Grandma would technically exceed the annual $16,000 exclusion limit per gift by a total of $14,000, but she wouldn’t owe additional taxes. That’s because she would report the gift to the IRS using a Form 709 and deduct $14,000 from her $12.06 million lifetime exemption. As a result, she would still be eligible to give away up to $12,046,000 tax-free.
| How the Lifetime Exemption Limit Works |
| Gift Value | 2022 Gift Tax Exemption Limit | Taxable Amount | 2022 Lifetime Gift Tax Exemption Limit | Remaining Lifetime Exemption Limit |
| $30,000 | $16,000 | $14,000 | $12,060,000 | $12,046,000 |
It’s important to remember that a person’s lifetime exemption limit applies to gifts that a person gives while still alive and property left to heirs after the person’s death.
How to Calculate the Gift Tax
As you can see, only people with millions of dollars to give away are subject to the federal gift tax. But if you’re one of those fortunate people, calculating your gift tax liability isn’t overly difficult.
Like federal income tax, gift tax rates are marginal, with the top rate reaching 40%. The larger a gift is, the more a person will potentially pay in taxes. But remember, you don’t have to pay gift taxes until someone exceeds their lifetime exemption.
After eclipsing this lifetime limit, taxes will be due on gifts that surpass the annual exclusion limit ($16,000 in 2022 and $17,000 in 2023). To calculate their tax liability, the donor would use the following tax brackets:
| Federal Gift Tax Rates |
| Taxable Amount Exceeding Annual Exclusion Limit | Gift Tax Rate |
| $0 – $10,000 | 18% |
| $10,001 – $20,000 | 20% |
| $20,001 – $40,000 | 22% |
| $40,001 – $60,000 | 24% |
| $60,001 – $80,000 | 26% |
| $80,001 – $100,000 | 28% |
| $100,001 – $150,000 | 30% |
| $150,001 – $250,000 | 32% |
| $250,001 – $500,000 | 34% |
| $500,001 – $750,000 | 37% |
| $750,001 – $1,000,000 | 39% |
| $1,000,000+ | 40% |
Using the above rates and brackets, the first $10,000 of this hypothetical gift would see taxes at 18%, the next $10,000 at 20% and the remaining $14,000 would be subject to a 22% rate. In total, the donor would be responsible for paying roughly $6,900 in gift taxes on the $34,000.
Bottom Line
Understanding the ins and outs of the federal gift tax can be important for the wealthy and generous, but most Americans will never face this tax. That’s because the IRS allows you to give away up to $16,000 in 2022 and $17,000 in 2023 in money or property to as many people as you like each year. The government also exempts $12.06 million in 2022 and $12.92 million in 2023 in gifts from tax over a person’s lifetime. However, if an individual gift does exceed the annual exclusion, you’ll need to file a Form 706 and report the gift to the IRS.
Tax Planning Tips
- Harvesting losses in your portfolio can reduce taxes on capital gains and a financial advisor can help you do it.Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Understanding how capital gains taxes work is an important component of investing. Use SmartAsset’s capital gains tax calculator to determine how large your tax bill might be for certain transactions.
Photo credit: iStock.com/Zerbor, iStock.com/alexsl, iStock.com/vlada_maestro
Patrick Villanova, CEPF® Patrick Villanova is a writer for SmartAsset, covering a variety of personal finance topics, including retirement and investing. Before joining SmartAsset, Patrick worked as an editor at The Jersey Journal. His work has also appeared on NJ.com and in The Star-Ledger. Patrick is a graduate of the University of New Hampshire, where he studied English and developed his love of writing. In his free time, he enjoys hiking, trying out new recipes in the kitchen and watching his beloved New York sports teams. A New Jersey native, he currently lives in Jersey City.
FAQs
The annual federal gift tax exclusion allows you to give away up to $16,000 each in 2022 to as many people as you wish without those gifts counting against your $12.06 million lifetime exemption. (After 2022, the $16,000 exclusion may be increased for inflation.)
What happens if I gift more than the annual exclusion? ›
You can give up to the annual exclusion amount ($16,000 in 2022) to any number of people every year, without facing any gift taxes or filing a gift tax return. If you give more than $16,000 in 2022 to someone in one year, you do not automatically have to pay a gift tax on the overage.
What is the gift tax limit for 2023? ›
2023 annual gift tax exclusion
Every year, the IRS grants an annual gift tax exclusion that allows you to make up to a certain amount of gifts to people without incurring any gift tax. In 2023, that amount is rising to $17,000, up $1,000 from where it was in 2022.
What the maximum you can gift tax free? ›
How the gift tax is calculated and how the annual gift tax exclusion works. In 2022, you can give up to $16,000 to someone in a year and generally not have to deal with the IRS about it. In 2023, this threshold is $17,000.
How does IRS know you gifted money? ›
Filing Form 709: First, the IRS primarily finds out about gifts if you report them using Form 709. As a requirement, gifts exceeding $15,000 must be reported on this form.
How do I claim lifetime gift tax exemption? ›
Lifetime Gift Tax Exemption and Estate Tax
Gifts made each year in excess of the $16,000 annual limit per recipient reduce your federal gift/estate tax exemption when you die. For instance, let's say you give your grandson a gift of $25,000 in 2022. The first $16,000 is not taxable because of the annual exclusion.
How much can you inherit from your parents without paying taxes? ›
There is no federal inheritance tax—that is, a tax on the sum of assets an individual receives from a deceased person. However, a federal estate tax applies to estates larger than $12.06 million for 2022 ($12.92 million in 2023). 12 The tax is assessed only on the portion of an estate that exceeds those amounts.
How much money can be legally given to a family member as a gift IRS? ›
The IRS allows every taxpayer is gift up to $16,000 to an individual recipient in one year. There is no limit to the number of recipients you can give a gift to. There is also a lifetime exemption of $12.06 million.
Do I have to report gifted money as income? ›
Essentially, gifts are neither taxable nor deductible on your tax return. Also, a monetary gift has to be substantial for IRS purposes — In order for the giver of the sum to be subject to tax ramifications, the gift must be greater than the annual gift tax exclusion amount.
How do you gift a large sum of money to family? ›
To do this, you've got to use IRS Form 709 when filing your annual tax return. You need to complete and submit Form 709 for any year that you make a taxable gift. Sending in the form doesn't necessarily mean you'll have to pay anything on the gift — it's just the form you'll need to use to declare the gift.
By making maximum use of the annual gift tax exclusion, you can pass substantial amounts of assets to loved ones during your lifetime without any gift tax. For 2022, the amount is $16,000 per recipient. In 2023, the amount will increase by $1,000, to $17,000 per recipient.
What is the lifetime exclusion for gift tax 2022? ›
Lifetime Gift Exclusion
This is the total amount—$12.06 million for 2022—you're able to give away tax-free over the course of your lifetime above the annual gift tax exclusion. The exclusion is doubled to $24.12 million for married couples.
How do I get around gift tax? ›
5 Tips to Avoid Paying Tax on Gifts
- Respect the gift tax limit. The best way to avoid paying the gift tax is to stay within the limit set by the IRS. ...
- Spread a gift out between years. ...
- Provide a gift directly for medical expenses. ...
- Provide a gift directly for education expenses. ...
- Leverage marriage in giving gifts.
Gift Tax Return Statute of Limitations
In general, IRC 6501(a) requires the IRS to assess a gift tax liability within three years after the due date of the gift tax return, or three years after the gift tax return was actually filed, whichever is later.
Who is responsible for filing a gift tax return? ›
Who Must File. In general. If you are a citizen or resident of the United States, you must file a gift tax return (whether or not any tax is ultimately due) in the following situations. If you gave gifts to someone in 2022 totaling more than $16,000 (other than to your spouse), you probably must file Form 709.
What percentage of gift tax returns are audited? ›
The latest IRS data book was issued in June 2020 and provides some interesting statistics. In 2019, the odds of an estate tax return being audited was just under 7% and for a gift tax return, the chances were slightly less than 1%.
Who are relatives for gift tax exemption? ›
Gift from Relatives
As per the Income Tax Act, the following list of persons is defined as a relative of an individual. Hence, only money received from the following persons will be exempt from income tax for an individual taxpayer. Spouse of the individual. Brother or sister of the individual.
What is lifetime exemption amount? ›
That's up from $16,000 in 2022 and $15,000 in 2021, where it had been stuck since 2018. The other big change: the lifetime estate and gift tax exemption (also known as the unified credit), will jump to $12.92 million in 2023, up from $12.06 million in 2022.
Who can claim lifetime capital gains exemption? ›
Your company must be a small business corporation (SBC) at the time of the sale. It must be a share sale of your business (sole proprietorships and partnerships do not qualify). More than 50% of the business's assets must have been used in an active business in Canada for 24 months prior to the sale.
Can I give my house to my son to avoid inheritance tax? ›
The most common way to transfer property to your children is through gifting it. This is usually done to ensure they will not have to pay inheritance tax when you die. Inheritance tax starts at 40%.
In the current tax year, 2022/23, no inheritance tax is due on the first £325,000 of an estate, with 40% normally being charged on any amount above that. However, what is charged will be less if you leave behind your home to your direct descendants, such as children or grandchildren.
Does inheritance affect Social Security? ›
Dear Wondering: No, your inheritance money from your parents' estate will not affect your gross Social Security benefit in any way. Your monthly SS benefit is based solely on your lifetime earnings record from working, and income from other sources is not counted when computing your Social Security benefit amount.
What is the best way to gift money to a child? ›
Choose a Method of Gifting
- Lump sum of cash, which may or may not be earmarked for a particular expense.
- Cash paid in installments.
- Transferred investments.
- Contributions to a child's retirement account.
- Contributions to a 529 plan whether for an adult child's education or a grandchild's education.
You most likely won't owe any gift taxes on a gift your parents make to you. Depending on the amount, your parents may need to file a gift tax return. If they give you or any other individual more than $32,000 in 2022 ($16,000 per parent), they will need to file some paperwork.
Who pays the gift tax the giver or the receiver? ›
However, in general, these are the basics you need to know about cash gifts and cash payments: Cash gifts up to $16,000 per year don't have to be reported. Excess gifts require a tax form but not necessarily a tax payment. Gift reporting and taxes are required of the donor, not the recipient.
What is the safest way to give someone a large amount of money? ›
Sending a wire transfer through your bank might be the best way to send a large amount quickly. As convenient as P2P apps are, they limit how much you can send, generally $1,000 to $10,000 per transfer, and delivery can take multiple days.
What is the best way to give someone a large amount of money? ›
7 methods to consider when transferring large amounts of money
- Automated clearing house (ACH) ...
- Bank-to-bank. ...
- Money transfer. ...
- Cash-to-cash. ...
- Prepaid debit cards. ...
- Foreign currency check. ...
- International money transfer service.
You first use the annual exclusion to reduce the gift by $16,000 to $100,000. To avoid paying gift tax on the remaining $100,000, you can use an amount equal to the estate tax on $100,000 of your unified credit.
How much can I gift to a relative tax-free UK 2022? ›
You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your 'annual exemption'. You can give gifts or money up to £3,000 to one person or split the £3,000 between several people.
How much can a parent gift a child tax-free in 2022? ›
Like we've mentioned before, the annual exclusion limit (the cap on tax-free gifts) is a whopping $16,000 per person per year for 2022 (it's $17,000 for gifts made in 20232). So even if you do give outrageously, you wouldn't have to file a gift tax return unless you went over those limits.
While you can give your son or daughter a cash gift of £20,000 (or more), there may be tax implications. That's because any money you give that exceeds your £3,000 tax-free gift allowance will be added to the value of your estate and may be subject to inheritance tax when you die.
Can I give my son 100000 UK? ›
What is the maximum I can gift to my child or grandchild? Essentially, you can give as much as you like – but if you want to ensure it's tax-free, you'll need to consider both how much you give, and when you give it. Everyone gets an annual gifting limit of £3,000 that's exempt from IHT.
What is the best way to gift money to grandchildren? ›
8 Ways to Gift Assets to Your Grandchildren
- Cash is King. ...
- Pay for educational or medical costs. ...
- Make gifts to a custodial account or a trust. ...
- Set funds aside for higher education in a 529 account. ...
- Go traditional with IRAs and savings bonds. ...
- So many ways to make a difference for your grandchildren.
For 2022, the gift tax exclusion has been set at $16,000 per person per year for an individual filer. For example, that means you can give up to $16,000 worth of monetary gifts to your son, up to $16,000 in gifts to your daughter, and up to $16,000 in cash to your little cousin.
How much money can a person receive as a gift without being taxed in 2022? ›
Annual Gift Tax Exemption
The IRS allows individuals to give away a specific amount of assets or property each year tax-free. In 2022, the annual gift tax exemption is $16,000, meaning a person can give up $16,000 to as many people as he or she wants without having to pay any taxes on the gifts.
Can I give a gift of 100k to my son? ›
The Annual Gift Limits
In 2021, the annual gifting limit is $15,000 but that amount can change from year to year. Many people assume that as long as their gifts are below that dollar threshold that no gift tax has to be paid but if they gift over that annual limit then someone has to pay gift tax.
Do I have to pay inheritance tax on my parents house? ›
There is normally no IHT to pay if you pass on a home, move out and live in another property for seven years.
Can my parents gift me 100k tax-free? ›
The annual exclusion is the maximum value of gifts you can give to each person. For example, during the 2022 tax year, the law allows you to make an unlimited number of tax-free gifts as long as no one receives more than $16,000.
Can I gift my house to my son and still live in it? ›
You can give away your house to your child and still live in it, but you will have to pay bills and rent at the market rental value rate which is the amount that houses are currently being rented at in the area.
Can I give my son money for a house deposit? ›
A key requirement for gifting money for a house deposit is that you'll need to include proof of the financial gift. This will be a written declaration stating that the money is a gift and is not expected to be paid back.
