If you make large enough gifts to relatives or friends, you might owe the federal gift tax. Here are the basics on how the gift tax works.
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Those affected by Hurricane Beryl in Texas and Hurricane Debby in some states in the Southeastern United States have more time to file federal tax returns and make certain tax payments. The additional time allowed by the IRS includes tax returns that were extended by the original April 15, 2024, deadline as well as certain payments that are normally due after the storms impacted these people. The IRS news release regarding Hurricane Beryl provides details for more information on the extensions for those impacted in Texas while the IRS news releases regarding Hurricane Debby provides details about those impacted in the Eastern U.S.
The gift tax is a federal tax that the IRS imposes on people that gift property . The gift tax is applicable when you receive nothing in exchange, or receive compensation that’s less than the property's full value.
This can include, but isn’t limited to:
Note that whether or not you intend for the property to be a gift, the gift tax applies if you don’t receive full compensation for the property that’s been given.
The following types of gifts are some examples of gifts that are exempt from the federal gift tax. You can make unlimited gifts in these categories without any gift tax or estate tax consequences and without having to file gift tax returns:
The gift tax rate only applies to gift amounts exceeding the lifetime exclusion limit, which is $12.92M for the 2023 tax year.
The IRS gift tax rate is a marginal rate, meaning the rate increases as the total amount you’ve gifted for the year increases. This is similar to how income tax rates work.
The gift tax is applied based on brackets. For example, $0 to $10,000 over the lifetime exclusion limit is taxed at the lowest gift tax rate, while each incremental bracket is taxed at a higher and higher tax rate.
The gift tax rate currently ranges up to 40%, with anything gifted over the lifetime exclusion limit being taxed at 40%.
The gift tax only kicks in after lifetime gifts exceed $12.92 million in 2023.
The first thing to know about the federal gift tax is that gift givers—not gift recipients—have to pay it. Thankfully, you won’t owe the tax until you’ve given away more than your lifetime limit plus the annual limit in cash or other assets during your lifetime.
So, actually owing the gift tax isn't a concern for most folks. But you may still have to file gift tax returns even though you don’t owe any taxes.
The annual gift tax exclusion provides additional shelter.
The annual federal gift tax exclusion allows you to give away up to $17,000 each in 2023 to as many people as you wish without those gifts counting against your $12.92 million lifetime exemption. (After 2023, the $17,000 exclusion may be increased for inflation.)
Say you give two favored relatives $21,000 each in 2023 and give another relative $10,000. The $21,000 gifts are called taxable gifts because they exceed the $17,000 annual exclusion. But you won’t actually owe any gift tax unless you’ve exhausted your lifetime exemption amount.
If you give three individuals $17,000 each in 2023, these gifts are ignored because no single gift exceeds the annual exclusion.
You have a $12.92 million federal estate tax exemption for 2023. You can leave up to that amount to relatives or friends free of any federal estate tax. If you’re married, your spouse is entitled to a separate $12.92 million exemption.
Gifts made during your lifetime can reduce your taxable estate by moving assets out of your ownership and therefore out of your estate. However, gifts in excess of the annual exclusion also reduce your estate tax exemption.
Bottom line: Making annual gifts up to the annual exclusion is a good way to reduce your taxable estate without any negative side effects.
You and your spouse (if you’re married) can each contribute up to $17,000 per year to a 529 college savings plan for a future student without decreasing your lifetime gift tax exemption. You can even make a lump-sum contribution in a single year and treat it as though it was made over five years for gift tax purposes, thanks to a special IRS rule.
Contributions to a 529 college savings plan are gifts to the future student. However, a special rule allows you to make a lump-sum contribution in a single year and treat it as though it was made over five years for gift tax purposes.
For example, you can contribute $85,000 (5 years x $17,000) in 2023 to jump-start a 529 college savings account for your child. If you’re married, your spouse can do the same.
The only caveat: You can’t make any additional gifts to the same recipient during those years without using part of your $12.92 million exemption.
If you make a taxable gift (one in excess of the annual exclusion), you are required to file Form 709: US Gift (and Generation-Skipping Transfer) Tax Return.
If you’re married, you can’t file a joint gift tax return. Each spouse needs to file a separate return if they make any taxable gifts. You can, however, choose to “split” gifts with your spouse. Making a split gift allows you to take advantage of your annual gift tax exclusion plus your spouse’s exclusion for a gift that is made entirely by you.
For example, say you gave $34,000 to your child in 2023. By treating it as a split gift, you can completely shelter the gift with your $17,000 exclusion plus your spouse’s $17,000 exclusion.
If you choose to make a split gift, you need to file Form 709, and your spouse must consent to the arrangement.
This article only covers the basics of federal gift taxes. For more information, see IRS Publication 950: Introduction to Estate and Gift Taxes. Also see the instructions for Form 709.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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