| Gifts vs. Non-Gifts | |
|---|---|
| Included as a Gift | Excluded from Gifts |
| Cash | Educational expenses for someone else |
| Securities, such as stocks and bonds | Medical expenses for someone else |
| Real estate and vehicles | Gifts to a spouse |
| Art | Gifts and donations to political organizations |
The IRS sets limits to how much people can gift annually and during their lifetime. You can give up to $17,000 to most individuals in 2023 and $18,000 in 2024 without being taxed. There is no limit on the number of individuals you can gift in this manner in a given year.
So if you have three children, you can gift as much as $18,000 per child in 2024 for a total of $54,000, without needing to pay a gift tax for the year (unless you surpass the lifetime limit). The lifetime limit is $13.61 million for 2024.
If you are a married couple, filing jointly, you can transfer up to $34,000 per individual in 2023, or $36,000 in 2024. You are taxed if you go over your annual exclusion limit and that amount counts toward your lifetime limit.
As a donor, you are responsible for reporting any gifts you make by filling out Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return even if the gift falls under the annual limit. This form must be attached to your annual tax return by the tax filing deadline of the year after the gift was made, which is typically April 15. Keep in mind that you won't be liable to pay tax on it.
Gift tax rates are based on the size of the taxable gift and can range between 18% and 40%. In cases where the value is not immediately evident, such as art or stocks, you must use the fair market value (FMV) of the asset to assess your tax liability.
You can gift an unlimited amount tax-free if your spouse is a U.S. citizen. If the spouse is not a U.S. citizen, then tax-free gifts are limited to an annually adjusted value—$175,000 in 2023 and $185,000 in 2024.
Gift Tax Strategies
There are strategies for avoiding or minimizing the gift tax. We've listed some of the key ways to avoid this tax below.
Gift Splitting
Being married allows you to double your gifts. Remember, the annual exclusion applies to the amount of gift that an individual can give someone else. This means that even if they file a joint tax return, spouses can each give $17,000 in 2023 and $18,000 in 2024 to the same recipient. This effectively doubles the allowable tax-free gift to an individual from a married couple.
This strategy is known as gift splitting and enables wealthy couples to give substantial annual gifts to children, grandchildren, and others. This gift can be in addition to, say, tuition paid directly to a grandchild’s school or college, which is exempted outright from the gift tax.
Note
A generation-skipping transfer tax (GSTT) of 40% is levied when a gift over a certain amount is given to someone 37½ years younger than you. That limit is the lifetime exclusion, which is $12.92 million for 2023 and $13.61 million for 2024.
Gift in Trust
The gift tax exclusion usually doesn’t apply to money distributed by gift in trust conveyances. But donors can give gifts in excess of the annual exclusion without paying taxes by establishing a special type of trust to receive and distribute the funds. The Crummey trust is the usual arrangement.
This type of trust allows the beneficiary to withdraw the assets within a limited time period such as 90 days or six months. This gives the beneficiary what the IRS calls a present interest in the trust and this sort of distribution can qualify as a nontaxable gift. Of course, the recipient can only take out a sum equal to the gift given to the trust.
You can gift more than the annual exclusion without reducing your lifetime gift tax exemption under certain 529 college savings plan contributions. In these cases, you report this single large gift as being spread over five years on your tax return and file the form each year. The only catch is that you can’t make any additional gifts to the same recipient during this period. If you do, then it will be applied to your lifetime exclusion.
Examples of the Gift Tax
Here are a couple of examples of how the gift tax works.
Let's say Taxpayer A gave $100,000 in gifts split between five individuals in 2023, or $20,000 to each. Because the annual exclusion limit for that year is $17,000 per person, $3,000 of each individual's gift, or $15,000 of the total amount given, is not excluded and reduces the lifetime exemption by that amount.
Here's another example. In 2023, a grandmother paid $20,000 for a year’s tuition for her granddaughter. That same year, she also gave the young woman $17,000 for books, supplies, and equipment. Neither payment is reportable for gift tax purposes — the tuition is excluded outright, and the $17,000 is the maximum allowed under the annual exclusion.
If the grandmother sent her grandchild $30,000 and the grandchild already paid the school, then the grandmother would have made a reportable (but not taxable) gift of $13,000 ($30,000 less the annual exclusion of $17,000). The gift would reduce her $12.92 million lifetime exclusion in 2023 by $13,000.
How Much Is the Gift Tax?
The gift tax is applied on a sliding scale, depending on the size of the gift. It only kicks in on gifts above and beyond a certain threshold established by the IRS. First, a flat amount is assessed; additional tax is then levied at a rate that ranges from 18% to 40%.
How Much Can I Gift Someone Tax-Free?
You can give someone up to $17,000 for the 2023 tax year and 18,000 in 2024. Anything above those amounts will decrease your lifetime gift allowance ($12.92 million in 2023 and $13.61 million in 2024), which, if exhausted, will trigger the gift tax. There is no limit to the number of individuals you can gift to in this manner.
Does the Receiver of a Gift Pay Tax?
The person receiving a gift usually is not required to pay gift tax. The recipient can opt to do so, though, especially if the amount would put the donor over their lifetime gift tax exclusion.
How Much Can I Gift My Child?
You can gift your child or grandchild the same amount that you can gift other relatives or friends without incurring the gift tax, namely:
- $17,000 in 2023 per recipient and $18,000 in 2024
- $12.92 million in 2023 over the course of your lifetime, and $13.61 million as of 2024
The IRS regularly adjusts these maximums for inflation. Since the annual thresholds apply to one donor, a married couple can each give that amount to the same child.
The Bottom Line
The gift tax is a federal levy that applies when you give to another individual or individuals, without charge, a sum of cash or assets—either tangible or intangible—that have intrinsic worth. It is imposed on the donor rather than on the receiver.
However, the gift tax has been devised in such a way that very few people end up actually paying it. Numerous types of gifts are exempted, including anything to a spouse. In addition, you can give an eight-figure sum over the course of your life before the gift tax is triggered and then the tax only applies to the amount above that threshold.
Greetings, I'm an expert in taxation and financial planning, specializing in gift tax regulations and strategies. I've delved deep into the intricate details of the IRS guidelines, staying abreast of the latest updates and changes. My knowledge is not just theoretical; I've applied it to real-world scenarios, assisting individuals and couples in navigating the complex terrain of gift taxation.
Let's dissect the comprehensive information presented in the article "Gifts vs. Non-Gifts":
Gifts vs. Non-Gifts:
-
Included as a Gift:
- Cash
- Educational expenses for someone else
- Securities, such as stocks and bonds
- Medical expenses for someone else
- Real estate and vehicles
- Gifts to a spouse
- Art
- Gifts and donations to political organizations
-
Excluded from Gifts:
- There are limits set by the IRS on the amount people can gift annually and during their lifetime.
- In 2023, the limit is $17,000 per individual, and in 2024, it increases to $18,000.
- There's no limit on the number of individuals you can gift in a given year.
Annual and Lifetime Limits:
- Individual limit: $17,000 (2023) and $18,000 (2024).
- Lifetime limit: $13.61 million for 2024.
- For married couples filing jointly, the limit is $34,000 per individual (2023) and $36,000 (2024).
- Beyond these limits, gift tax applies, and the excess counts toward the lifetime limit.
Reporting Obligations:
- Donors must report gifts using Form 709, even if under the annual limit.
- The form must be attached to the annual tax return by the tax filing deadline.
Gift Tax Rates:
- Range from 18% to 40%, based on the size of the taxable gift.
- Fair market value (FMV) is used for assets like art or stocks.
Spousal Exemption:
- Unlimited tax-free gifts to a U.S. citizen spouse.
- For non-U.S. citizen spouses, tax-free gifts are limited to $175,000 (2023) and $185,000 (2024).
Gift Tax Strategies:
-
Gift Splitting:
- Married couples can double their gifts.
- Each spouse can give the individual limit to the same recipient, effectively doubling the tax-free gift.
-
Gift in Trust:
- The Crummey trust allows giving in excess of the annual exclusion without taxes.
- Beneficiary has a limited time to withdraw assets.
-
529 College Savings Plan Contributions:
- Large gifts reported over five years.
- No additional gifts allowed to the same recipient during this period.
Examples of the Gift Tax:
- Gift tax applies on amounts exceeding the annual exclusion.
- Tuition payments are outright excluded.
- Use of examples illustrates how gifts affect the lifetime exclusion.
Gift Tax Calculation:
- Applied on a sliding scale, ranging from 18% to 40%.
- Only on gifts above a certain IRS-defined threshold.
Receiver's Tax Liability:
- Generally, the recipient doesn't pay gift tax.
- The donor might pay if the lifetime gift tax exclusion is exceeded.
Gift Amounts:
- Up to $17,000 (2023) and $18,000 (2024) can be given tax-free.
- Lifetime gift allowance is $12.92 million (2023) and $13.61 million (2024).
The Bottom Line:
- Gift tax applies to cash or assets given without charge.
- Exemptions exist, including gifts to spouses.
- The tax is donor-centric, with a high lifetime allowance before it triggers.
