No, the IRS is not imposing a tax on the sweater you gave to Uncle Arnold for Christmas or those Amazon gift cards you gave your nieces. The IRS only starts taxing gifts when they surpass a certain dollar limit each year and during your lifetime. And gift taxes generally only hit the very wealthy.
First, understand what a “gift” means to the IRS. It’s any transfer to a person where “full consideration” is not received in return. The big picture? Every few years, the government sets a limit on the amount you’re allowed to “gift” to any person during the year.
So, then, how to avoid gift taxes? If you stay below that limit, called an “exclusion,” you won’t have to pay a tax on the gift; if you exceed the limit, the gift tax kicks in. Remember, the giver, not the receiver, pays the gift tax. (Think of it as the No Good Deed Goes Unpunished section of the tax code.)
From 2002 to 2005, you could give gifts of up to $11,000 per recipient each year; by 2022, that number had jumped to $16,000. Starting in 2023, that number is $17,000. That means you can give away that amount without those gifts counting against your lifetime amount. Note that is for each recipient.
So, in 2023, you can give $17,000 to each of your three children and six grandchildren without triggering any tax. Couples have an even better deal, so the limit doubles: A married couple can give each of their children and grandchildren, for example, double the amount, since each member of the couple is entitled to the exclusion.
Over the limit — what then?
This doesn’t mean that it’s illegal to gift over that annual amount to any one person. It doesn’t even mean that it will necessarily be taxed. Once you go over, however, another calculation kicks in: Over the course of a lifetime, a person can take an “applicable exclusion” — the amount exempted from federal gift and estate taxes. In 2023, that amount is $12.92 million.
Let’s say in 2023, as an individual, you give someone a $20,000 gift. You do not immediately have to pay a tax on that. However, the $3,000 above the limit is subtracted from that $12.92 million. If you are among the very wealthy, there’s a chance you may use that up over your lifetime. Only then will you get hit with the gift tax, and it could be huge.
Also, know that not every gift is taxable. These gifts are tax-exempt:
- Tuition and medical expenses
- Gifts to your spouse
- Gifts to a political organization for its use
The bottom line?
Chances are you won’t ever get hit with the gift tax. However, if you are in a position to give substantial sums of cash or property, work with a tax professional to find out if you owe tax. Also, even if you don’t owe tax, you may have to submit certain forms, and a tax pro can advise you on this as well.
Before Sending
If you have questions about gifting money, assets, property, and more to someone else, give us a call before you send it. There might be some tax retrocessions you should know beforehand.