Not All Gifts Are Created Equal

It is better to give than to receive. But if you give a gift above a certain amount, you may wind up owing money to the IRS! The federal tax code has very specific rules about how much you can transfer to (gift) others each year (annual exclusion) and during your lifetime (lifetime exemption). Gifts in excess of the maximum amount may be subject to gift tax, which is paid by the giver. 

Currently, you can gift up to $16,000 per person to an unlimited number of individuals in any given taxable year without triggering the gift tax. For gifts given by a married couple, the annual exclusion amount is $32,000 (twice the individual exclusion). The lifetime exemption is the amount you can gift across all tax years before you owe gift taxes. For 2022, the lifetime exemption is $12.06 million. Because the lifetime exemption amount is generous at this time, many people will not owe taxes on their gifts. However, high net worth individuals should be mindful of how gifting can affect the estate tax that may be due upon their death.

What is Considered a Gift under Gift Tax Law?

According to the IRS, a gift is a transfer of money, property, or other assets, such as real estate or stock, for which the giver does not receive “full consideration.” Consideration is a contractual term that means exchange value. Full consideration, as the IRS defines it, is fair market value. The fair market value of property such as real estate is the price that a buyer and seller, both knowing of the property and under no pressure to trade, would agree to on the open market. 

However, not every gift is subject to gift tax! In addition to the annual exclusion, there are limited exclusions that relieve a giver of paying federal gift taxes. These exceptions include:

• Tuition or medical expenses paid on behalf of another person (These are referred to as education and medical exclusions.)

• Gifts to a political organization 

• Gifts to your spouse (Unlimited gifts can be exchanged between spouses without gift tax implications, assuming both spouses are US citizens) 

• Gifts to qualified charities

What Else Should I Know about the Gift Tax?

When giving a gift to another person, here are some other tax-related points to remember:

• The giver customarily pays the gift tax. In IRS terminology, the giver is known as the donor, and the receiver is known as the donee. The donee can pay the gift tax instead of the donor. Here, the IRS advises that the payment should be discussed with a tax professional. In the event that a donor owes tax on the gift and does not pay it, the IRS could seize the gift or otherwise turn to the donee for tax payment, but this usually only happens if the donor is deceased.

• There is a federal gift tax form. Gifts that exceed the annual exclusion amount could be subject to tax, depending on whether or not you have used up your lifetime exemption. If your gift exceeds the annual exclusion amount or applies the annual exclusion to a transfer in trust, you must file Form 709 even if no gift tax is due. Answers to common questions about gift tax issues can be found on this IRS resource. 

How Does the Lifetime Exemption Work for Gift Taxes?

The lifetime gift tax exemption is tied to the estate tax exemption. The gift tax exemption and the estate tax exemption are effectively treated as a single amount ($12.06 million in 2022, but subject to change in future years). Thus, during a taxpayer’s life, the non-excluded gifts they give count against their lifetime exemption and could also affect their estate tax. For example, let us say that a taxpayer has gifted $2 million over their total annual exclusions by the time they pass away in 2022. That amount counts against their lifetime exemption, reducing the balance to $10.06 million. If their estate’s value exceeds $10.06 million, estate taxes would be due on the excess amount. Most individuals likely will not exceed the lifetime gift tax exemption. And, even if they do, the tax is graduated (i.e., the tax increases in proportion to the taxable amount). Overall, the gift tax rate ranges from 18 percent for taxable amounts up to $10,000, to 40 percent for taxable amounts over $1 million. 

Give Yourself the Gift of an Estate Planning Professional

Generosity is its own reward. Still, make sure that your gifts are properly accounted for, that the right gift tax forms are filed, and that gifting fits into your estate planning goals. An estate planning attorney can help you understand the tax implications of gifting, including the long-term estate tax implications and some of the hidden costs of a gift, such as real estate taxes, transfer fees, or capital gains tax.