A Brief Guide to the IRS Gift Tax | Small Business CPA (2024)

One important component of estate planning is making provisions to pay any gift taxes that may be assessed by the IRS on cash or assets you transfer or bequeath to others.

This gift tax kicks in only if you exceed the lifetime gift tax exemption of $11.7 million. Each year, a gift tax limit is set. This number determines the maximum amount you can gift to someone before it starts counting toward the $11.7 million. If you have given a gift that exceeds this limit in.a year, you will have to file a gift tax return.

Keep in mind that in these situations the person giving the gift has to pay the gift tax, rather than the person receiving the gift. Thus, failure to adequately account for your liability to the government could impact your estate in unforeseen ways. To help you understand how the gift tax works, our small business accountants are breaking down what you need to know to avoid mistakes and keep the IRS from getting a sizable portion.

Understanding the Gift Tax

Some of the most noteworthy parts of current IRS gift tax guidelines include the following:

• The annual exclusion allows individuals to give up to $15,000 gift tax-free to the same recipient.
• Spouses are entitled to the same annual gift tax exclusion benefit for a combined total of $30,000 to a single recipient (called a "split gift").
• The annual gift tax exclusion applies to an unlimited number of recipients.
• As of 2021, the lifetime gift tax exemption allows you to give up to $11.7 million over the course of your life without having to pay a tax. Married couples each get $11.7 million exemption, so a couple can give away $23.4 million before paying a tax.
• Any gift amount exceeding that $15,000 limit will then begin to count toward the lifetime exclusion of $11.7 million
• Widows and widowers may claim any unused portion of the lifetime gift tax exclusion of their deceased spouse to raise the exemption a maximum of $10.68 million
• Transfers in excess of either the annual gift tax exclusion or the lifetime gift tax exclusion are subject to a maximum tax rate of 40%
• Donors are generally not required to file a Form 709 (gift tax return) for transfers that fall under the annual exclusion
• Form 709 is required for transfers or gifts that count against the lifetime exemption or for any split gifts made during the tax year

Let's look at an example. Say you want to give your niece an annual gift of $20,000. The first $15,000 is not taxable because it would fall under the yearly exclusion, but the remaining $5,000 would count against your lifetime gift tax exemption, cutting into the $11.48 million. Anything after that would be taxed in accordance with federal estate taxes.

Gifts That Are Not Taxable

Not all gifts are considered taxable, including:

• Donations to charities approved by the IRS,
• A gift to your spouse, assuming he or she is a U.S. citizen;
• A gift to pay for tuition, assuming the money covers only tuition (not room and board, books, or supplies) and is paid directly to the institution;
• Donating to a political organization;
• Gifts to cover medical expenses, if the gift is paid directly to the medical facility (Like sending a payment directly to a hospital to cover a bill);

Not only do you not need to report these to the IRS to apply toward the gift tax, any gifts to a qualifying charity can be deducted from the total amount you gifted.

How the Gift Tax is Related to Estate Tax

Just as with gift taxes, the lifetime exemption for federal estate tax is $11.7 million. That means you can leave up to $11.7 million to others after your death without it being subject to a federal estate tax. The estate tax is similar to the gift tax in that if you are married, your spouse is entitled to their own $11.7 million lifetime exemption.

Giving gifts during your lifetime can serve to lower that amount that you leave to your friends or family so that it is under the $11.7 million mark. Just keep in mind that gifts made that are larger than the $15,000 annual exclusion will reduce your estate tax exemption.

In other words, gifts of less than $15,000 to one individual in one year can help reduce your taxable estate without the repercussions.

How to File a Gift Tax Return

If you've made a gift of more than $15,000 to the same recipient with one year, you have made a taxable gift. That doesn't necessarily mean you will have to pay the gift tax, though. After all, if the total amount by which you've exceeded each years annual exclusion adds up to less than the lifetime limit of $11.7 million, you will not have to pay. Regardless, you will have to fill out a Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax Return come tax season.

This return is due along with your tax return and any other IRS form, on the filing deadline of the calendar year after you make your gift.

Spouses are not allowed to file a joint gift tax return, they much each fill out their own forms if they have made a gift of over $15,000. Married couples can opt to use gift "splitting", however, where they combine their gift tax exclusions to give a gift that exceeds the limit.

For instance, to gift someone $20,000, you can treat it as if you gave away only $10,000, while your spouse gave away their own $10,000. This way it still falls under the limit. Those who use this "gift splitting" method to give larger gifts will still have to file a gift tax form 709.

Contact a Raleigh CPA for Tax Planning

Remember, these are just general guidelines that may or may not apply to your own situation. To learn more about tax preparation, reach out to our Raleigh CPAs today at 919-420-0092 or fill out our contact form.