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The gift tax is an item that will not be on the radar of most taxpayers, but in special circumstances, it could impact your taxes. However, the good news is that while large gifts may require you to file with the IRS, very few taxpayers will create a tax liability by exceeding the annual gift threshold.
Here’s how the gift tax works and when you need to report gifts to the IRS.
What is the gift tax?
The gift tax imposes a tax on large gifts, preventing massive transfers of wealth without any tax implications. It is a transfer tax, not an income tax. Ordinary monetary and property gifts are unlikely to be impacted by this tax, since the yearly limit for 2024 is $18,000 per giver per recipient.
When you surpass the annual threshold, you must file IRS Form 709 with your return declaring the size of the gift. But even that doesn’t mean you’ll be taxed on it. Instead, a gift is taxed only after you exceed your lifetime estate and gift exemption, which in 2024 is $13.61 million for individuals and $27.22 million for married couples. So the excess of gifts over the annual threshold counts toward this lifetime limit.
A single person who gives several gifts of up to $18,000 to different recipients in a year, for example, won’t be impacted by the gift tax and won’t have to file a gift tax declaration.
An important consideration, however, is understanding what counts as a gift. For instance, if you sell a house for substantially less than the IRS would deem its “fair market value” – perhaps as a favor to a family member or friend – the difference between the market value and your price is considered a gift and may need to be reported on a gift tax return if it exceeds $18,000 per giver and per recipient.
What is the gift tax rate?
After giving out money or property exceeding the lifetime threshold, your gift tax rate will be between 18 percent and 40 percent, depending on how far your cumulative gifts eclipse it.
How does the gift tax work?
Each year you exceed the annual gift threshold, you need to declare these gifts with the IRS. But you will not be subject to tax until your excess cumulative gifts exceed the lifetime estate and gift exemption.
For example, suppose you gifted $25,000 to a family member in 2024. Your excess gift is $7,000 for that year, or $25,000 minus the $18,000 annual exclusion. That $7,000 excess applies to your lifetime exclusion of $13.61 million for a single taxpayer or $27.22 million for a married couple. Those lifetime figures are drawn from the estate tax exemption, since the lifetime exemption counts against the combination of taxable gifts – those exceeding the annual exclusion amount per giver per recipient – made during life and from your estate after death.
Other kinds of gifts are exempted entirely, including:
- Gifts to directly pay for medical or educational expenses
- Gifts to a political organization to be used by the organization
- Gifts to one’s spouse, though some limits apply if the spouse is not a U.S. citizen
- Charitable giving
So good estate planning can help eliminate these taxes or at least minimize them.
Who has to pay the gift tax?
The gift giver pays the gift tax, if any is due. If the giver owes a gift tax, the IRS does not require the recipient to pay the tax.
In general, very few people pay the gift tax, since even large five- and six-figure gifts are covered by the lifetime estate and gift exemption.
But where even less affluent people may be impacted is knowing that they need to declare a larger gift to the IRS, which counts the excess gift against your lifetime exemption. If significant gifting to family or friends is important to you, it may be worth considering spreading out gifts to children, grandchildren or other family members or friends so that you don’t exceed the $18,000 per person a year limit, saving you from a little tax return complexity.
How can you avoid the gift tax?
Pretty much everyone can avoid having to pay the gift tax, but in the event that you are in a position to give extensively, here are some important tips:
- Couples can double up. If you are part of a couple, remember that you can each give up to $18,000 a year to the same recipient, effectively giving $36,000 to one recipient without breaking past the annual exemption. This is referred to as “gift splitting.” Married couples who plan to do this should still file a gift tax return – even if the gift won’t be taxable – so they can properly report and elect their gift splitting.
- Distribute gifts over years. Spread out gifts over a period of years instead of giving in a big chunk at one time.
- Target giving to exempted categories. Pay directly for medical costs, educational expenses and other exempted categories, rather than gifting funds for any purpose.
- Get a comprehensive view of your estate. Factor into your estate plan how much you’ve given or plan to give in your lifetime and what you expect to give through your estate, since the lifetime exemption also includes anything you leave in your estate after you pass away.
- Work with an expert. Talk with your accountant, financial planner or wealth management team about how you can distribute your assets in ways that won’t trigger the gift tax. Large and complex financial, business or real estate holdings can generate big tax bills if you don’t have someone helping you work out the logistics.
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While you may have heard of the gift tax and worried that you’ll be required to pay taxes on larger gifts, it may not be true. The good news is that most people aren’t affected by the gift tax or the gift tax limits and aren’t required to disclose smaller gifts to the IRS.
However, if you know that you’re making what could be counted as a large gift — such as extending an interest-free loan or giving someone money now that they will later use for college, but haven’t yet spent — make sure you find out if it will require you to declare your gift.