An Overview of the Gift Tax

an overview of the gift tax

There’s a cynical saying that goes something like this: “No good deed goes unpunished.” If you’re not familiar with it, it means that people who act kindly will often get punished for their acts of kindness. Whether this is true may be up for debate. What’s not up to debate is that subject to certain conditions, the IRS will gladly tax anyone for the gifts they give.

What Is the Gift Tax?

A gift tax is a tax individuals must pay if they make certain gifts to others and the value of those gifts exceeds a certain threshold. There are two gift tax thresholds to understand.

First, there’s the annual gift tax limit. In 2023, this was $17,000 and this amount goes up each year. In 2024 it will be $18,000. These amounts are per person, so a married couple could jointly gift up to $36,000 in 2024.

One thing to note about this limit is that it applies not just per year, but also per gift giver and per recipient. For example, if in 2023 you gave $10,000 to Bob and $15,000 to Mary, there’s no gift tax to report to the IRS.

Despite your gifts (added together) exceeding the $17,000 threshold, no single recipient received more than $17,000. In contrast, if you gifted $20,000 to John in 2023, then you’d have to report that gift to the IRS.

Second, there’s a lifetime gift tax limit. It’s currently $12.92 million and only when this threshold is exceeded, does the IRS actually collect the gift tax. So even if you make a large enough gift in a particular tax year to report it to the IRS (you’ll use IRS Form 709 for this), you don’t pay taxes on the gifts you’ve made up until you exceed this lifetime limit.

Just to reiterate, you report the gift if you exceed the annual limit, but you only pay the tax if you exceed the lifetime limit.

Additionally, only the amount in which you exceed the annual limit gets counted toward your lifetime limit. For instance, if you gave $47,000 to a friend of yours in 2023, only $30,000 goes against your $12.92 million lifetime gift tax limit.

Keep in mind that in 2026, this lifetime limit will revert to approximately $5-$6 million (depending on inflation) unless Congress elects to keep the current gift tax lifetime exemption limit in place.

Who Pays the Gift Tax?

In the vast majority of cases, only the gift giver (donor) must pay the gift tax. In special situations, the donee (person receiving the gift) may agree to pay the gift tax, but to do this, the parties will typically consult with a tax professional to meet the necessary conditions.

What Qualifies as a Taxable Gift?

The IRS counts almost anything as a gift as long as it has monetary value and the person giving the gift receives nothing in return. This means almost anything can be subject to the gift tax, such as cash, real estate, vehicles, insurance proceeds, a forgiven debt and securities (like stocks).

Even though the donor usually pays a gift tax, if the gift itself increases in value after the gift is made, that appreciation in value could be taxable to the recipient. This might happen with a gift of stocks that rises in value after the donee receives the gift.

Gifts Excluded from the IRS Gift Tax

Despite the wide range of gifts that could be subject to the gift tax, there are exclusions from the gift tax. These generally include:

  • College tuition or medical bills for someone else (this must be directly paid to the school or medical provider)
  • Gifts to a spouse
  • Gifts to a political organization

A caveat to the college tuition exemption exists with 529 college savings plans. Contributions to these plans are considered gifts for gift tax purposes.

How Much Is the Gift Tax?

The exact gift tax varies between 18% and 40%. The precise gift tax rate depends on the gift amount subject to the gift tax. For amounts $10,000 and lower, the rate is 18%, but for amounts more than $1 million, it’s 40%. A complete table can be found in the instructions for Form 709. Note that these are 2022 rates because 2023 rates aren’t out as of the time of this writing. However, the 2023 rates should be the same or very similar to the 2022 rates.

Looking for More Information About Gift Taxes?

The basic premise of the gift tax is fairly straightforward and will only affect a small percentage of taxpayers. However, when making a lot of gifts over a lifetime or sharing bank accounts with non-spouses, things can quickly get complicated.

There’s also the fact that if you have to worry about paying a gift tax (and not just reporting it), you probably have extensive financial assets and more complicated tax concerns. So it will probably be well worth the time and money to consult with a financial planning and tax professional to properly plan your finances and estate to avoid paying more taxes than necessary.

Kienitz Tax Law is here to help you with your tax issues. Schedule your FREE consultation today!

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