When you give someone else a gift, you could be opening yourself up to possible tax consequences. The federal gift tax requires people to pay taxes on gifts that exceed specific amounts. A gift is considered anything of financial value, whether cash, property, securities and more. Most people won’t have to worry about this tax thanks to annual and lifetime limits. However, if you plan to transfer substantial wealth to loved ones, you may be subject to paying this tax someday.
The gift tax is a federal tax that applies when you transfer property to another person and don’t receive the full value in return. Usually, the person giving the gift pays the tax. However, the receiver may pay the tax instead in some circumstances.
Most people don’t have to worry about this tax thanks to annual and lifetime exclusions. For example, you only have to file a gift tax return if you give more than $16,000 to another recipient per year and more than $12.06 million over your lifetime.
The annual gift tax exclusion in 2022 is $16,000. However, you’ll have to file a gift tax return if you gift more than $16,000 to another person in a single year. The good news is that the $16,000 limit applies per individual, meaning you could give significantly more than $16,000 in a year, as long as you don’t give more than $16,000 to just one person.
The law also allows married couples to give more. For example, you and your spouse can each give someone $16,000, for a total of $32,000, before you’re required to file a gift tax return. Unlike your standard tax return, married couples can’t file this return jointly. Each spouse must file their own for their share of the total gift made.
When you exceed your annual exclusion ($16,000 in 2022) and file a gift tax return, any amount above your annual exclusion is subtracted from your lifetime exclusion.
The lifetime gift tax exclusion in 2022 is $12.06 million, up from $11.7 million in 2021. The lifetime exclusion represents the amount you can give beyond your annual exclusion before being subject to gift taxes.
It is important to note that if you surpass your lifetime exclusion, you don’t have to pay tax on everything you give. You still get an annual exclusion, meaning you only pay taxes on amounts over $16,000 per recipient.
According to the IRS, a gift is anything transferred from one person to another without receiving full payment. A taxable gift could include cash, but it could also include anything else of value, such as real estate, stocks, jewelry and more.
You may also be giving a gift if you offer someone an interest-free or less-than-market interest rate loan, too. When in doubt, we recommend speaking with your tax professional.
There are some notable exceptions to the IRS definition of a gift, including:
Before you take advantage of these exemptions, there are a few things to consider. First, the exemption for gifts to your spouse only applies if you’re legally married. It doesn’t apply to those in a domestic partnership, civil union or similar formal relationship.
It’s also important to know that different annual gift limits apply if your spouse isn’t a U.S. citizen. For gifts to non-citizen spouses, there’s an annual limit of $164,000 in 2022, up from $159,000 in 2021.
Regarding gifts to charitable organizations, your gifts are only exempt from gift taxes if the organization meets the IRS definition of a qualified organization. Examples include community chests or trusts, war veterans’ organizations, domestic fraternal societies, churches, civil defense organizations and other nonprofit organizations. You can use the IRS Tax Exempt Organization Search Tool to ensure an organization is considered qualified.
Finally, there are certain restrictions to the exemption for tuition and medical expenses. First, the education exemption only applies to tuition — it doesn’t apply to room and board, textbooks or other educational costs. And with tuition and medical expenses, checks must be made directly to the organization or institution. You can’t simply give the money to a loved one for them to use for that purpose.
Any gifts you give over your annual exclusion have implications beyond just potentially paying the gift tax. Gift and estate taxes are interconnected, and you use part of your lifetime exclusion each time you file a gift tax return. By doing so, you’re increasing the amount of your estate that could be subject to estate taxes.
Here’s an illustration of how it works:
As of 2022, your lifetime exclusion is $12.06 million. Suppose that over the course of your life, you gift $5 million above and beyond your $16,000 annual exclusions. As a result, you have $7.06 million of your lifetime exclusion left. Anything in your estate above and beyond $7.06 million will be subject to estate taxes when you die.
Remember that gifts only count against your lifetime exclusion when they exceed $16,000. So, if you had gifted just as much money over your lifetime but in annual increments of $16,000 or less, you would still have your entire $12.06 million lifetime exclusion left — which can potentially decrease your estate tax liability.
If you exceed your annual exclusion of $16,000, you’ll file IRS Form 709 by the tax filing deadline the following tax year. Thankfully, it’s easy and you’ll file Form 709 with your annual federal tax return.
When you fill out Form 790, you’ll enter any taxable gifts you made throughout the year. You can also indicate whether you’re splitting the gifts with your spouse, enabling you to give twice as much as a couple as you can as an individual.
Remember that filing the gift tax return doesn’t necessarily mean you’ll have to pay tax. Rather, gifts on your gift tax return reduce your remaining lifetime exclusion. So it’s not until you’ve used up the entire lifetime exclusion that you must pay gift taxes.
The rate depends on the value of the gifts and ranges from 18% to 40%. However, you’ll only have taxable gifts if you’ve gifted more than $12.06 million above your annual exclusions. You can double-check your potential gift tax rate using the IRS Form 709 Instructions.
Most people will never have to pay the gift tax because of the lifetime exclusion. Even if you fear you might be subject to it someday, there are ways to get around it legally, including:
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