Give generously enough and your reward is paperwork
If you drive a car, they’ll tax the street. If you try to sit, they’ll tax your seat. And if you give a gift of significant financial value, well, they may tax that too.
Okay, that’s not how the song goes (and it’s not even about the IRS anyway) but it’s worth asking: what are gift taxes, and do you need to be thinking about them?
Most people won’t ever have to worry about paying gift taxes, but you might need to file a gift tax return even when you don’t owe anything.
- If someone receives a gift with financial value above a certain amount that gift is taxable
- Any tax owed is the responsibility of the gift giver, but if they don’t pay, the IRS will go after the recipient too
- There is both an annual limit and a lifetime limit of the amount that can be gifted before any tax is owed
- While hardly anyone ends up paying gift taxes because the lifetime limit is high (we’re talking about over twelve million dollars for this to be relevant), the annual limit could mean you need to file a gift tax return, even if you don’t actually owe any gift taxes
What are gift taxes?
The IRS defines the gift tax as “a tax on the transfer of property by one individual to another while receiving nothing, or less than the full value, in return.”
But don’t worry about that new PlayStation game you bought for your nephew – in practice, only gifts of a significant financial value show up on the IRS’s radar. And even then, you have to give away millions before they hit you with a tax bill.
In most circumstances, the gift giver is responsible for paying any taxes on the gift (that is, if they manage to exceed the exclusion limits – we’ll get to those later).
However, if the gift giver fails to pay taxes on a gift, the IRS is well within their rights to come knocking on the recipient’s door instead.
What counts as a gift?
It’s not just cold, hard cash you need to be thinking about here. Any uncompensated transfer of valuable property – including everything from real estate to artwork to paying for your kid’s wedding – counts as a gift.
It can also include debt forgiveness, some interest-free loans (as long as they’re to someone you have a direct relationship with), or transferring the benefits of an insurance policy. And if you have a joint bank account with someone, you put money in, and they take it out, that’s a gift too.
If you’re wondering if the IRS would consider something a taxable gift, ask your CPA.
Not all gifts are subject to gift taxes. Certain categories of gift are exempt:
- Gifts to spouses (if they are a US citizen)
- Gifts to political organizations
- Tuition or medical expenses (but only if the giver pays the institution directly)
- Gifts to 501(c)(4), 501(c)(5), and 501(c)(6) organizations
|📑Note: Gifts to spouses are non-taxable only if the recipient is a US citizen. However, there is a special exclusion limit for gifts to non-citizen spouses -- $164,000 in 2022 and $175,000 in 2023.|
Not a gift
Just because you’re giving something away doesn’t automatically mean it’s a gift. Donations to qualified charities are not gifts and are not subject to gift taxes. In fact, it’s pretty much the opposite – you can deduct them from your taxes.
Gift tax exclusion limits
Now that we’ve established what gift taxes are, here’s why you probably don’t have to worry too hard about them: the exclusion limits. You have to give a significant amount of money (or the equivalent in property) before the gift tax applies at all.
And there’s not just one exclusion limit: there’s a separate annual limit and lifetime limit, and you have to exceed both before any gift tax is owed.
- The annual exclusion limit was $16,000 in 2022 and is $17,000 in 2023.
- The lifetime exclusion limit is $12.92 million as of 2023
That $17,000 annual exclusion limit is per recipient, by the way. You can send a hundred different people a $17,000 gift without ever exceeding it. But if you give $17,001 to just one person, you’re over the annual limit.
Once you’re over the annual exclusion limit, you need to file a gift tax return to inform the IRS, but you still don’t owe any gift taxes yet. Instead, any amount you give over the annual exclusion limit is subtracted from your lifetime exclusion limit. Only once you’ve exceeded all exclusion limits do you actually begin to accumulate a tax bill.
So it’s pretty clear why most people never have to pay any gift taxes: you’d have to give people over $17,000 each enough times that the excess adds up to almost $13 million.
|⚠️Note: Only gifts of present interest – meaning the recipient is free to use and enjoy the gift right away – can be excluded from annual limits. If the recipient has to wait until a specific time in the future to have full access to the gift, it is a gift of future interest and goes straight towards your lifetime exclusion limit.|
Exclusion limits for married couples
Married couples can take advantage of gift splitting rules, meaning that they can each claim half of a gift even if only one of them signed the check. That way, a gift that would normally exceed the exclusion limit can come in well under $17,000.
Additionally, married couples also share a $24 million lifetime exclusion limit, rather than individual $12 million limits.
How do I file?
If you’ve given enough to one person in a given year to exceed the annual exclusion limit, first of all, congratulations on your generosity. That’s a very impressive gift!
Even though you won’t have to actually pay any gift taxes unless you exceed the lifetime exclusion limit, exceeding the annual exclusion limit still means filing a gift tax return on Form 709.
Unless you’re giving away a massive chunk of wealth, you probably don’t have to worry about gift taxes. It’s not something that comes up for most people.
However, if you do have quite a lot of money and plan on giving some of it away – or if you win the lottery and you’re feeling generous – make sure to plan that through with your CPA first.
If that’s you, schedule an advisory call with DiMercurio Advisors to learn about the safest and most efficient ways of making large gifts. And if that’s not you, schedule a call anyway. We do lots of other fun stuff with bookkeeping, tax compliance, and business formation.