Rarely does anyone ever pay gift taxes. That’s right. You probably will never have to pay a gift tax. Ever! The IRS has rules, lots of them, and gifting is no exception, but the gift tax is one of the most misunderstood and easiest to avoid.
Many believe you can only give a certain amount each year without incurring gift taxes, which is true. You have an annual exclusion amount that you can give to as many people as you wish each year. An exclusion means it’s not even counted toward the gift tax calculation. In 2023 is $17,000.
However, even if you give ten people more than $17,000 in one year, unless you’ve given more than your total lifetime exemption amount of $12,920,000 (2023), there’s no gift tax owed. That’s a lot of zeros that you can gift.
Here’s an example
Let’s say you’re generous and give five family members $20,000 each. That’s $100,000, but you would have only used up $15,000 of your $12.92 million exclusion. Why only $15,000? Remember, the first $17,000 you gift to each person per year is excluded, sooo…
- $20,000(gift to each person) – $17,000 (annual exclusion per person) = $3,000 over the annual exclusion for each gift
- $3,000 x 5 family members = $15,000 total amount over the annual exclusion
- $12,920,000 (2023 Lifetime Exemption) – $15,0000 (total amount over the annual exclusion) = $12,905,000
You still have $12.905 million left to gift over your lifetime
Don’t worry. It’s tied to inflation. So if you want to give $12.90 million, you most likely will be able to give away a bit more in future years as the limit increases. You can stop worrying now.
Remember, each year, you can give $17,000 to any individual or number of people, and those funds will never count toward your lifetime limit. So, in reality, you can gift much more than $12 million.
The gift-giving goodness keeps getting better…
The annual exclusion amount and lifetime exemption amounts are per individual. Couples can team up and give $34,000 to any individual ($17K each) per year or almost $25 million.
A special rule called a 5-year election lets you give five years of annual exclusion gifts at once.
So Grandpa could give you $85,000 ($17,000 x 5) in one year, and as long as he hasn’t given away more than his lifetime exemption of $12.9 million, there’s no gift tax. Grandma could also gift you $85,000 as well.
Some gifts don’t even count as gifts; those amounts are unlimited!
- Gifts to a spouse: As long as your spouse is a U.S. citizen, otherwise, different rules apply.
- Educational expenses: To qualify for the unlimited exclusion for qualified education expenses, the gift must be directly paid to the educational institution for tuition only. If your granddaughter goes to Penn State and you want to help with tuition, you must pay Penn State directly. Books, supplies, and living expenses do not qualify. Those expenses would fall into the $17,000 annual gift exclusion category.
- Medical expenses: Medical payments must be paid directly to the entity providing the care to qualify. The expenses that qualify include diagnosis, treatment, procedures, and transportation. Also included is the payment of premiums for medical or long-term care insurance.
While the rules are straightforward (at least, I think), paperwork is involved. We are dealing with the IRS. The first thing to know is that the recipient does not pay the gift tax. The giver does.
The IRS wants to keep track of the gifts you give. If you make a taxable gift exceeding your $17,000 annual exclusion, you must file Form 709: U.S. Gift (and Generation-Skipping) Tax Return, due April 15.
Even if you don’t owe a gift tax because you have not reached the $12.9 million limit, you are still required to file this form. Remember, you must keep a copy for the rest of your life to document proof of the lifetime exemption.
Giving gifts has several consequences for the giver and the receiver, so please see an attorney, tax specialist, or your CERTIFIED FINANCIAL PLANNER(TM) professional. Creating a plan for any gifting in advance is the key.
If you enjoyed this post and know someone who wants to give you a gift, you can easily share it with them through any of the share buttons below! If you’re interested in gifting to charities, then check out our blog post about QCDs