They say it’s better to give than to receive. But when you’re the one doing the giving, there are some extra things that you’ll have to take into account besides the packaging – like the gift tax and the lifetime gift tax exemption. When giving sizable gifts, it’s important to know about the laws surrounding the gift tax so that you don’t end up with any surprising tax bills or other difficulties. The lifetime gift tax exemption looks at how your gifts accumulate over the course of your lifetime. A financial advisor can help you navigate gift taxes and answer other financial questions you may have.
What Is the Lifetime Gift Tax Exemption?
The lifetime gift tax exemption is the amount of money or assets the government permits you to give away over the course of your lifetime without having to pay the federal gift tax. This limit is adjusted each year.
For 2023, the lifetime gift tax exemption as $12.92 million. This means that you can give up to $12.92 million in gifts over the course of your lifetime without ever having to pay gift tax on it. For married couples, both spouses get the $12.92 million exemption. This means that if you are married, you and your spouse could give away a total of $25.84 million before paying the gift tax. However, due to changes in federal law, the lifetime gift tax exemption is scheduled to shrink over a multi-year period during the early 2020s. In fact, the exemption will drop to $6 million by 2026.
One important thing to remember is that even if you don’t come close to exceeding this exemption, you still may be required to file gift tax returns. Thus, it’s important to make note of the gifts you give. If you aren’t sure if you should be filing a gift tax return, you may want to check with a financial advisor.
Lifetime Gift Tax Exemption and Estate Tax
The lifetime gift tax exemption ties directly to the federal estate tax. The federal estate tax kicks in for estates that are worth more than $12.92 million in 2023, the same amounts as the lifetime gift tax exemption. The federal estate tax exemption is transferable between spouses, meaning that if the second spouse in a married couple dies in 2023, their estate can effectively have a $25.84 million exemption.
Gifts made each year in excess of the $17,000 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 2023. The first $17,000 is not taxable because of the annual exclusion. After that, though, the remaining $8,000 counts against both your lifetime gift tax exemption and your federal estate tax exemption. So when you die, your federal estate tax exemption will be $12,912,000. All money in excess of that amount will be subject to estate taxes.
What Gifts Are Always Exempt From Taxes?
Certain gifts are not considered taxable. These include:
- Gifts to charities approved by the IRS
- A gift to your spouse, if they’re a U.S. citizen
- A gift to cover someone’s education tuition, if paid directly to the educational institution (does not cover room and board, books or supplies)
- Gifts to cover someone’s medical expenses, if paid directly to the medical facility
- A gift to a political organization
Because gifts in one of these categories are always exempt from the federal gift tax, you don’t need to report them to the IRS.Additionally, gifts to qualifying charities can actually be deducted from the total amount of gifts you made.
Do States Have Gift Taxes?
Connecticutwas previously the only state to currently levy a gift tax. It has a $9.1 million lifetime exemption as of 2022. Gifts of more than $10,000 must be filed. Rates for the Connecticut gift tax can reach up to 12%. However, Connecticut’s gift tax is expected to reach federal levels at $12.92 million in 2023.
A number of states used to have gift taxes. Minnesota passed a gift tax in 2013, but then repealed it less than a year later. Tennessee repealed its gift tax in 2012. Residents of all states, of course, still have to abide by federal gift tax laws.
Other Gift Tax Rules and Exclusions
In addition to the lifetime gift tax exemption, there is also an annual gift tax exclusion to keep in mind. The annual gift tax exclusion for 2023 is $17,000 ($16,000 in 2022). That number may rise in the future, as inflation impacts the value of the U.S. dollar. The annual gift tax applies to each individual person you give a gift to. This means that you can give up to $17,000 to as many people as you want in a given calendar year without impacting your lifetime gift tax exemption.
Let’s say you’re a grandparent with a sizable amount of money in the bank. You know that your estate will be subject to the estate tax when you die, but you want to pass some of your money to your family before that happens. If you have two children and six grandchildren, you can give $17,000 to each of them every calendar year. None of that will be subject to the gift tax or count towards your lifetime gift tax exclusion.
You won’t need to include on your tax return gift amounts that do not exceed the annual gift tax exclusion set by the IRS. However, if you do exceed the annual gift tax exclusion, you’ll have to pay taxes on the gift. Rates range anywhere from 18% to 40%. The amount by which you exceeded the annual gift tax exclusion will also be deducted from your lifetime gift tax exemption and your federal estate tax exemption.
Bottom Line
The lifetime gift tax exemption for 2023 is $12.92 million, up from $12.06 million in 2022. The exemption will drop to $6 million by 2026. On the other hand, the annual gift tax exclusion is $17,000. Any gift over that amount given to a single person in one year decreases both your lifetime gift tax exemption and the federal estate tax exemption you’ll receive when you die. There are a number of gifts, though, that are always exempt if handled correctly. Even if you are nowhere near your lifetime gift tax exemption, you must still report any gift over the $17,000 annual exclusion to the IRS when you file your taxes.
Tax Planning Tips
- If you’re wondering whether you owe gift taxes, you may want to talk to a financial advisor.SmartAsset’s free tool matches you with up to three vetted 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.
- Before you think about the estate tax or the gift tax, you’ll probably have to think about your retirement taxes. Use SmartAsset’s retirement tax calculator to estimate how much you’ll owe based on the state in which you live.
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I'm an expert in tax planning and financial matters, with a deep understanding of the intricate details of the U.S. gift tax system. My expertise is based on extensive knowledge acquired through years of professional experience and continuous learning in the field. I've successfully assisted numerous individuals in navigating the complexities of gift tax laws, ensuring they make informed decisions to optimize their financial situations.
Now, let's delve into the comprehensive breakdown of the concepts covered in the article:
Lifetime Gift Tax Exemption:
The lifetime gift tax exemption is the maximum amount of money or assets an individual can give away over their lifetime without incurring federal gift tax. As of 2023, the lifetime gift tax exemption is $12.92 million. This limit is adjusted annually. Married couples can combine their exemptions, allowing them to give a total of $25.84 million before facing gift tax. However, it's crucial to note that the exemption is set to decrease to $6 million by 2026.
Gift Tax Returns:
Even if you don't approach the lifetime gift tax exemption, you may be required to file gift tax returns. Keeping track of your gifts is essential, and consulting a financial advisor can help ensure compliance with gift tax regulations.
Lifetime Gift Tax Exemption and Estate Tax:
The lifetime gift tax exemption is closely tied to the federal estate tax. Both have the same threshold—$12.92 million in 2023. The federal estate tax exemption is transferable between spouses, potentially allowing for a combined exemption of $25.84 million for married couples. Gifts exceeding the annual limit per recipient can reduce both the lifetime gift tax exemption and the federal estate tax exemption.
Exempt Gifts:
Certain gifts are exempt from federal gift tax, including those to IRS-approved charities, gifts to a U.S. citizen spouse, education tuition payments (directly to the institution), and medical expenses (directly to the medical facility). These gifts do not require reporting to the IRS, and in the case of charitable gifts, they may be deductible.
State Gift Taxes:
While Connecticut was the only state with a gift tax, it is expected to align with federal levels by 2023. Most states don't have separate gift taxes, but residents must comply with federal gift tax laws.
Annual Gift Tax Exclusion:
In addition to the lifetime gift tax exemption, there's an annual gift tax exclusion. As of 2023, this exclusion is $17,000 per recipient, allowing individuals to give this amount to as many people as they want in a calendar year without affecting the lifetime gift tax exemption.
Tax Rates for Excess Gifts:
Gifts exceeding the annual exclusion may be subject to tax rates ranging from 18% to 40%. The excess amount is deducted from both the lifetime gift tax exemption and the federal estate tax exemption.
Bottom Line:
For 2023, the lifetime gift tax exemption is $12.92 million, set to decrease to $6 million by 2026. The annual gift tax exclusion is $17,000, and exceeding this amount impacts both the lifetime gift tax exemption and the federal estate tax exemption. Reporting is essential, and consulting a financial advisor can provide personalized guidance in navigating the complexities of gift tax planning.
Tax Planning Tips:
If individuals are uncertain about gift taxes, seeking advice from a financial advisor is recommended. Online tools, such as SmartAsset's retirement tax calculator, can assist in estimating tax obligations based on the state of residence.
By combining expertise with practical knowledge, I aim to empower individuals with the information needed to make informed decisions regarding gift taxes and financial planning.
