A gift tax is a federal levy imposed on individuals who transfer property to others without receiving anything of substantial value in return. Gifts can include cash, real estate, and other properties. The IRS sets annual and lifetime limits on the amount that can be gifted tax-free. Exceeding these thresholds requires the donor to report the excess and potentially pay taxes on the overage.
Key Takeaways
- The gift tax is a federal levy imposed on individuals giving away money or property without getting anything substantial in return.
- Gifts include valuable items like cash, real estate, or securities, which exceed the IRS’s set annual and lifetime limits.
- Lifetime and annual gift thresholds exist to limit tax-free gifting; exceeding these limits incurs tax obligations.
- Reports are mandatory for all gifts, even those below taxed thresholds.
- Strategies such as gift splitting and gifts in trust can effectively manage or reduce tax liabilities.
How Gift Tax Works
A gift is defined by the IRS as anything of value transferred without adequate compensation. The concept is broad, covering direct or indirect transfers, and includes cash, securities, real estate, vehicles, art, etc.
| 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 |
Every year, the IRS sets specific annual and lifetime thresholds for tax-free gifts. As of 2023, you can gift up to $17,000 to any number of individuals without triggering a tax, and $18,000 in 2024. Married couples filing jointly can significantly increase this amount through gift splitting.
Any portion of your gift that exceeds these annual limits reduces your lifetime exemption. Filing Form 709 is required to track these gifts, even those below the annual limit.
Gift taxes range between 18% and 40%, calculated based on the taxable gift’s size. Art, stocks, or items with complex valuations require using their fair market value (FMV).
Unlimited tax-free gifting applies to U.S. citizen spouses but is capped for non-citizen spouses ($175,000 in 2023 and $185,000 in 2024).
Gift Tax Strategies
Strategies to sidestep or lessen gift taxes are crucial for effective tax planning:
Gift Splitting
Spouses can “double” their gifts using gift splitting ─ each can gift up to the annual limit, significantly raising the total non-taxable amount to a recipient.
Gift in Trust
Trust arrangements like the Crummey Trust enable periodic gifting, reducing taxliability. You can make large 529 plan contributions, spreading the value over five years for tax purposes while avoiding gift tax.
Generation-Skipping Transfer Tax
Be wary of the Generation-Skipping Transfer Tax (GSTT), which imposes a 40% tax on gifts to individuals more than 37½ years younger than you, after ingesting your lifetime exclusion amount.
Examples of Gift Tax Implementation
Example 1: If Taxpayer A gives 5 individuals $20,000 each in 2023, surpassing the $17,000 annual exclusion, $15,000 ($3,000 per individual) goes against the lifetime exclusion.
Example 2: In 2023, Grandmother pays $20,000 for granddaughter’s tuition, additionally giving $17,000 for educational supplies—both tax-exempt.
If instead, she gifts $30,000 directly, $13,000 exceeds the limit, reducing her lifetime exemption by that amount.
Gift Tax calculations
Gift taxes are calculated on a graduated scale; rates start at 18% and can rise up to 40% based on the taxable portion exceeding IRS-appointed thresholds.
FAQs
How Much Is the Gift Tax?
Gift tax relies on the excess of the annual exclusions. Flat amounts come first with additional taxes (18%-40%) on the excess.
How Much Can I Gift Someone Tax-Free?
For 2023: $17,000 per person, for 2024: $18,000. Amounts surpassing reduce lifetime exemptions ($12.92M for 2023 and $13.61M for 2024).
Does the Receiver of a Gift Pay Tax?
Typically, gift recipients are not liable for gift tax. Donors assume responsibility, although recipients can opt to shoulder this tax liability instead.
How Much Can I Gift My Child?
Children or grandchildren fall within the same tax-free annual gifting capacity ─ $17,000 in 2023, and $18,000 in 2024 ─ extendable to $12.92M over a lifetime ($13.61M in 2024). The IRS periodically inflates these limits.
Bottom Line
The gift tax, governed federally and taxing the provision of valuable assets without equitable compensation, primarily affects the donor. By taking advantage of IRS exclusions and applying strategic approaches, many high-value gifts can avoid hefty tax penalties.
Related Terms: estate tax, inheritance tax, tax planning, wealth management.
References
- Internal Revenue Service. “Frequently Asked Questions on Gift Taxes”, Select What is considered a gift?
- Internal Revenue Service. “Instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return”, Pages 2-3.
- Internal Revenue Service. “Frequently Asked Questions on Gift Taxes”, Selected How many annual exclusions are available?
- Internal Revenue Service. “Estate Tax”.
- Internal Revenue Service. “Frequently Asked Questions on Gift Taxes”, Selected What if my spouse and I want to give away property that we own together?
- Internal Revenue Service. “Instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return”, Pages 2, 4.
- Internal Revenue Service. “Instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return”, Page 20.
- Code of Federal Regulations. “Title 26: § 25.2512-1 Valuation of Property; In General”.
- Internal Revenue Service. “Frequently Asked Questions on Gift Taxes for Nonresidents not Citizens of the United States”, Select What can be excluded from gifts?
- Internal Revenue Service. “Instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return”, Pages 8-9, 20.
- The Tax Adviser. “Using a Crummey Trust to Preserve Gift Tax Exclusion”.
- Internal Revenue Service. “Instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return”, Page 7.
- Internal Revenue Service. “Frequently Asked Questions on Gift Taxes”, Selected Who pays the gift tax?
