Gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. If you are considering making a gift or have recently made one, it is important to understand how gift tax works and how it may impact you. In this article, we will provide a general guide on gift tax, including how it is calculated, who is responsible for paying it, and what types of gifts are subject to the tax.
What is the gift tax
The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The person giving the gift is responsible for paying the tax. The gift tax helps to ensure that individuals do not avoid paying estate tax by giving their assets away before they die.
How the annual gift tax exclusion works
Each year, an individual can give a certain amount of money or property to another person without having to pay gift tax. This is known as the annual gift tax exclusion. In 2022, the annual gift tax exclusion is $16,000 per recipient. In 2023, the annual gift tax exclusion will increase to $17,000 per recipient. This means that an individual can give $17,000 to as many individuals as they want in 2023 without having to pay gift tax.
How the lifetime gift tax exclusion works
In addition to the annual gift tax exclusion, there is also a lifetime gift tax exclusion. This is the total amount of money or property that an individual can give away over their lifetime without having to pay gift tax. In 2022, the lifetime gift tax exclusion is $12.06 million per individual. In 2023, the lifetime gift tax exclusion will increase to $12.92 million per individual. This means that an individual can give up to $12.92 million over their lifetime without having to pay gift tax.
Who pays gift tax
The person giving the gift is responsible for paying the gift tax. However, if the value of the gift exceeds the lifetime gift tax exclusion, the recipient of the gift may have to pay the tax instead.
What is considered a gift?
For the purposes of the gift tax, a gift is any transfer of money or property that is made without receiving full value in return. This includes gifts made in cash, gifts of property, and gifts made through a trust.
Gifts not subject to the gift tax
There are several types of gifts that are not subject to the gift tax. These include:
- Present-interest gift: A gift up to 17,000 in 2023 that the recipient can use, sell, or dispose of immediately is considered a present-interest gift and is not subject to the gift tax.
- Charitable gifts: Gifts made to charitable organizations are not subject to the gift tax.
- Gifts to a spouse: Gifts made to a spouse who is a U.S. citizen are not subject to the gift tax.
- Gifts for educational expenses: Gifts made to cover tuition or other qualified education expenses for a recipient are not subject to the gift tax.
How much is gift tax for 2022 – 2023
The gift tax rate for 2022 and 2023 is 40%. However, the first $12.06 million in gifts made in 2022 and the first $12.92 million in gifts made in 2023 are excluded from the gift tax thanks to the lifetime gift tax exclusion.
The gift tax exclusion for 2023 is $17,000 (it was $16,000 in 2022) and a lifetime gift tax exclusion of $12.92 million per individual (it was $12.06 million in 2022) . This means that you can give up to $17,000 per recipient in 2023 without having to pay gift tax. This exclusion applies to each individual recipient, so you can give $17,000 to as many individuals as you like without having to pay gift tax.
The federal gift tax rates range from 18% to 40%. The specific rate applied to your gift will depend on the value of the gift and your overall tax situation. The table below shows the amount and rates that will be applied.
| Taxable amount over | Taxable amount not over | Rate of excess tax |
|---|---|---|
| N/A | $10,000 | 18% |
| $10,000 | $20,000 | 20% |
| $20,000 | $40,000 | 22% |
| $40,000 | $60,000 | 24% |
| $60,000 | $80,000 | 26% |
| $80,000 | $100,000 | 28% |
| $100,000 | $150,000 | 30% |
| $150,000 | $250,000 | 32% |
| $250,000 | $500,000 | 34% |
| $500,000 | $750,000 | 37% |
| $750,000 | $1,000,000 | 39% |
| $1,000,000 | N/A | 40% |
How much can you gift tax free
In 2022, an individual can gift up to $16,000 per recipient tax-free thanks to the annual gift tax exclusion. In 2023, this amount will increase to $17,000 per recipient. In addition, an individual can gift up to $12.06 million over their lifetime in 2022 and up to $12.92 million in 2023 without having to pay gift tax thanks to the lifetime gift tax exclusion.
Advantages of making a gift
There are several advantages to making a gift:
- Avoiding estate tax: By making a gift while you are still alive, you can reduce the size of your estate and potentially avoid paying estate tax.
- Supporting loved ones: Making a gift can be a way to provide financial support to loved ones, whether it is to help pay for education expenses or to provide financial security.
- Reducing the burden of probate: If you make gifts while you are still alive, these assets will not have to go through the probate process after your death, which can be a lengthy and costly process.
Disadvantages of making a gift
There are also several disadvantages to making a gift:
- Loss of control: When you make a gift, you are giving up control of the asset. The recipient of the gift can do with it as they please, and you have no say in how it is used.
- Potential financial strain: Making a large gift can potentially strain your own financial resources, especially if you are relying on the income or assets that you are giving away.
- The Kiddie Tax: If you give funds to children, they may be subject to the Kiddie Tax, which applies the parents’ tax rates to investment earnings of their children that exceed a certain amount. For 2023, the Kiddie Tax applies to investment income exceeding $2,300 for a child under age 19 or in certain instances age 19 to under 24 if a full-time student. This means that giving funds to children may result in them having to pay higher taxes on their investment income.
How to report and pay the gift tax
If you make a gift that is subject to the gift tax, you will need to report it on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. This form must be filed by the April 15th following the year in which the gift was made. If you owe gift tax, you will need to pay it when you file your Form 709.
It is important to note that the gift tax rules can be complex, and it is recommended to consult with a tax professional to ensure that you are in compliance with the rules and to explore all available options for reducing or eliminating the gift tax.
