What’s a gift tax?

The IRS imposes a gift tax on individuals who transfer property without getting anything of significant value in return. A gift might be cash, real estate, or other property. The IRS restricts gifting. Report and apply any amount over this level for lifetime gift tax exemption. Once you surpass this limit, the gift tax applies. The gift tax may apply even if you never intended the transfer to be a gift.

Gift Taxes Work

Any valuable transfer is a gift. The IRS says the transfer might happen “either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”The federal government established the gift tax to deter income tax evasion. This tax eliminates hardship and requires donors and receivers to pay IRS taxes.

Donating valuable property without payment is a gift. The following table outlines what the IRS considers gifts and what is not:

The IRS restricts yearly and lifetime gifts. In 2023, most people may get $17,000 tax-free, rising to $18,000 in 2024. There is no restriction on how many people you may present this way every year.

If you have three children, you may present $17,000 per kid in 2023, totaling $51,000, without paying gift tax (until you exceed the lifetime maximum). For 2023, the lifetime cap is $12.92 million.

Married couples filing jointly can transfer $34,000 per person in 2023 or $36,000 in 2024. Taxes on excess yearly exclusion limits contribute toward lifetime limits.

Donors must declare donations by completing Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return, even if the gift is below the yearly limit. By April 15, the year after the donation, attach this form to your yearly tax return. Remember that it’s tax-free.

Gift tax rates range from 18% to 40%, depending on the gift amount. To determine tax obligations for unclear assets like art or equities, utilize the fair market value (FMV).

Tax Strategies for Gifts

There are gift tax avoidance and reduction options. Below are vital techniques to avoid this fee.

Splitting Gifts

Married people double their gifts. Remember, the yearly exclusion limits gifts. Spouses can gift $17,000 to the same beneficiary in 2023, even if they file a combined tax return. This increases the annual contribution to $34,000 without the gift tax.

The gift-splitting approach allows affluent couples to offer large annual presents to their children, grandchildren, and others. Another donation, such as tuition to a grandchild’s school or college, is accessible through the gift tax.

Trusted Gift

The gift tax exception often does not apply to trust proceeds. Creating a private trust to collect and distribute contributions beyond the yearly exclusion lets donors contribute more without incurring taxes. The typical arrangement is the Crummey trust.

This form of trust permits beneficiaries to withdraw assets within a specific timeframe, such as 90 days or six months. The recipient receives a current interest in the trust, which the IRS considers a nontaxable gift. Naturally, the beneficiary can only withdraw the trust gift.

Under some 529 college savings plan contributions, you can contribute over the yearly exclusion without affecting your lifetime gift tax exemption. Sometimes, you record a big gift across five years on your tax return and submit it annually. However, you cannot give the same person any further presents during this time. Doing so will apply to your lifetime exclusion.

Examples of Gift Tax

These examples demonstrate the gift tax.

Consider Taxpayer A’s 2023 contribution of $100,000 to five people, $20,000 apiece. The yearly exclusion limit of $17,000 per person does not exclude $3,000 of each individual’s donation, reducing the lifetime exemption amount to $15,000. After these contributions, Taxpayer A has $12.905 million of the exemption to contribute before gift taxes.

Another example. In 2023, a grandmother paid $20,000 for a year of tuition to support her grandson. She also gave the girl $17,000 for books, materials, and equipment that year. No gift tax is due because tuition is exempt, and the yearly exclusion is $17,000.

Grandma would have made a reportable (but not taxable) gift of $13,000 when she donated the future physician $30,000, and the young lady already paid the school. This would lower her $12.92 million lifetime exclusion by $13,000.

How much is the gift tax?

A sliding scale applies to gift tax, depending on size. It only applies to gifts beyond an IRS threshold. Taxes start with a fixed sum and range from 18% to 40%.

How much may I gift tax-free?

The 2023 tax year allows $17,000 in gifts, rising to $18,000 in 2024. Anything beyond those sums will deplete your lifetime gift allowance ($12.92 million in 2023), triggering the gift tax. You may give unlimited people this way.

Does a gift recipient pay taxes?

Gift recipients typically pay no gift tax. The beneficiary can do so if the sum exceeds the donor’s lifetime gift tax exclusion.

How Much Can I Give My Child?

You can offer your kid or grandchild the same amount as other relatives or friends without gift tax.

• In 2023, recipients received $17,000 (18,000 in 2024).
• $12.92 million in 2023 over your lifetime

The IRS frequently modifies maximums for inflation. Married couples can donate $17,000 each to the same child, totaling $34,000 annually.

Bottom Line

The federal gift tax occurs when you offer someone else cash or assets with inherent value without charge. It’s on the giver, not the receiver.

Despite its design, few individuals pay the gift tax. Many presents are excluded, including marital gifts. Even after giving an eight-figure sum, the gift tax applies to the amount beyond that level.

Conclusion

• A taxpayer who presents money or property to another pays the federal gift tax.
• Any large item, such as cash or natural land, given without compensation is a gift.
• The IRS restricts how much Americans may donate yearly and lifetime without paying the gift tax.
• Report all gifts, regardless of gift tax.
• To avoid gift tax, divide donations and provide gifts under trust.