MORE LIKE THISTaxes
Sending a $50 bill with your niece's graduation card? No need to sweat the federal gift tax. But if you're dispersing millions worth of gifts over the course of your lifetime, you may have to cut a few extra checks to the IRS.
What is the gift tax?
The gift tax is a federal tax on transfers of money or property to other people who are getting nothing (or less than full value) in return. It is typically paid by the giver, not the recipient.
The IRS places limits on how much you can gift someone each year. If you exceed the annual limit, you must report it on a tax return, and the excess of your contribution will be added toward your lifetime gift limit. Once you exhaust your lifetime exclusion, you may begin to owe gift taxes.
Is the gift tax deductible?
Gifts of cash or property to family or friends are not tax deductible. Only charitable donations to qualified nonprofits may be tax deductible.
Gift tax limit 2022
The gift tax limit for 2022 was $16,000. This amount, formally called the gift tax exclusion, is the maximum amount you can give a single person without reporting it to the IRS.
Keep in mind that even if you exceeded the exclusion and have to notify the IRS, you might not have to pay any taxes unless you have also gone beyond the additional lifetime gift tax exclusion. That limit was set at $12.09 million for 2022.
Gift tax limit 2023
The 2023 gift tax limit is $17,000. If you gift more than this amount during the year, you must file a federal gift tax return in 2024. The lifetime limit rises to $12.92 million in 2023.
What is the gift tax rate?
Gift tax rates range from 18% to 40%. There are, of course, exceptions and special rules for calculating the tax, so check the instructions to IRS Form 709 for all the details.
AD
Connect with a financial advisor paired to your needs.
Want to find out how to actually retire? Datalign can help you find an advisor.
via Datalign Advisory
Paid non-client promotion
How do I avoid gift tax?
Two things keep the IRS’s hands out of most people's candy dish: the annual gift tax exclusion, and the lifetime exclusion.
Stay below the annual threshold, and you can be generous under the radar. Go above, and you'll have to fill out a gift tax form when you file returns — but you still might avoid having to pay any gift tax.
How the annual gift tax exclusion works
The annual exclusion is a set amount that you may gift someone without having to report it to the IRS on a gift tax return. In 2022, you could have given up to $16,000 to someone in a year without having to deal with the IRS. In 2023, this threshold is $17,000. A bit more about how that works:
If you give away more than the annual exclusion amount in cash or assets (for example, stocks, land, a new car) to any one person during the tax year, you will need to file a gift tax return in addition to your federal tax return the following year. That doesn’t mean you have to pay a gift tax; it just means you need to submit IRS Form 709 to disclose the gift.
The annual exclusion is per recipient; it isn’t the sum total of all your gifts. That means, for example, that you can give $17,000 to your cousin, another $17,000 to a friend, another $17,000 to a neighbor, and so on in 2023 without having to file a gift tax return in 2024.
If you’re married, you and your spouse could give away $17,000 each in 2023 without needing to file a gift tax return in 2024. If you want to combine your annual exclusions in order to give someone a combined $34,000, you can choose to take advantage of "gift splitting".
Gifts between spouses are unlimited and generally don’t trigger a gift tax return. Although, if the spouse isn't a U.S. citizen, special rules may apply.
Gifts to qualified nonprofits are charitable donations, not gifts.
The person receiving the gift usually doesn't need to report the gift.
How the lifetime gift tax exclusion works
On top of the $17,000 annual exclusion in 2023, you get a $12.92 million lifetime exclusion in 2023. And because it’s per person, married couples can exclude double that in lifetime gifts. That comes in handy when you’re giving away more than the annual exclusion amount.
“Think about buckets or cups,” says Christopher Picciurro, a certified public accountant and co-founder of accounting and advisory firm Integrated Financial Group in Michigan. Any excess “spills over” into the lifetime exclusion bucket.
For example, if you give your brother $50,000 in 2023, you’ll use up your $17,000 annual exclusion. The bad news is that you’ll need to file a gift tax return, but the good news is that you probably won’t pay a gift tax. Why? Because the extra $33,000 ($50,000 - $17,000) simply counts against your lifetime exclusion. Next year, if you give your brother another $50,000, the same thing happens: you use up your annual exclusion and whittle away another portion of your lifetime exclusion.
The gift tax return keeps track of that lifetime exclusion. So if you don't gift anything during your life, then you have your whole lifetime exclusion to use against your estate when you die. Learn more about how estate tax works.
Another trick that can help you avoid an unwanted surprise is simply keeping an eye on the calendar. In 2026, the lifetime exclusion amount will revert back to its pre-2018 level of about $5 million (as adjusted for inflation) per individual.
» MORE: Learn how estate tax works.
Do you pay taxes when you receive a gift?
In most cases, no. Assets you receive as a gift or inheritance typically aren’t taxable income at the federal level. However, if the assets later produce income (perhaps they earn interest or dividends, or you collect rent), that income is probably taxable. IRS Publication 525 has the details. Also keep in mind that while there is no federal inheritance tax, some states may impose their own.
What can trigger a gift tax return
Caring is sharing, but some situations often inadvertently trigger the need to file a gift tax return, pros say.
Giving the grandkids college money
If grandparents put, say, $40,000 in a 529 plan for a grandchild, that may trigger the gift tax exclusion because it's over the limit.
A special rule allows gift givers to spread one-time gifts across five years’ worth of gift tax returns to preserve their lifetime gift exclusion.
» MORE: Learn how inherited IRAs work
Springing for vacations, cars or other stuff
If you fork out $40,000 for a wedding, or pay for the crazy-expensive honeymoon, get ready to do some paperwork.
If you’re paying tuition or medical bills, paying the school or hospital directly can help avoid the gift tax return requirement (see the instructions to IRS Form 709 for details).
Laid-back loans
Lending money to friends and family can be tricky, and the IRS can make it even worse. It considers interest-free loans as gifts. Or, if you lend them money and later decide they don't need to repay you, that's also a gift.
Joint bank accounts
“Let’s say you live by Grandma, so for convenience, we're going to put you on Grandma's bank account. Guess what just happened?” Picciurro says. “If you're put as a joint [owner] on a bank account with somebody and you have the right to take the money out at any time, essentially Grandma is giving you a gift.” This applies to joint accounts when the other owner is not your spouse.
Frequently asked questions
Who pays the gift tax?
According to the IRS, money or property that is transferred to another person without receiving anything in exchange is a gift. Gifts that exceed a certain value may be subject to a tax. The donor, not the recipient, typically pays the gift tax.
What are the gifting rules in 2023?
In 2023, taxpayers can gift up to $17,000 to a person without reporting it to the IRS on a federal gift tax return. Anything that exceeds the annual threshold counts toward the lifetime exclusion. The lifetime exclusion for 2023 is $12.92 million.
Advertisem*nt
SoFi Checking and Savings Member FDIC | CIT Bank Platinum Savings Member FDIC | Citizens Online Savings Account Member FDIC |
|---|---|---|
NerdWallet rating | NerdWallet rating | NerdWallet rating |
Learn More | Learn More | Learn More |
APY4.30% With $0 min. balance for APY | APY4.85% With $5,000 min. balance for APY | APY4.50% With $0.01 min. balance for APY |
Bonus$250 Earn up to $250 with direct deposit. Terms apply. | BonusN/A | BonusN/A |
» Need more guidance? See our full roundup of financial advisors.
