Gifting is a great thing for both the one doing the giving and for the receiver. But how much can you gift before the IRS comes calling? You might be surprised to know that for many people, they’ll never pay taxes on those gifts. It's all because of the generous gift tax exclusion included in the US tax law.
Due to the gift tax exclusion, you can literally shield hundreds of thousands or millions of dollars over your lifetime from income tax. And your recipients will generally never have to pay taxes on your gifts, even if you do exceed the annual or lifetime gift tax exclusion limits.
If you gave away a lot of money this year, make sure that you use a capable tax software that understands the gift tax limits and can get you the deductions you deserve. These are our favorite tax software companies. Let’s see how the gift tax works.
What Is The Gift Tax?
The gift tax is a set of tax rules around gifting. Annually, you can give $17,000 tax-free in 2023 and $18,000 in 2024. If you go over $17,000, you still don’t owe taxes until your lifetime limit is reached. That limit is $12.92 million for 2023 and $13.6 million in 2024. That’s up from $12.02 million in 2022.
The lifetime limit received a big increase in 2018, going from $5.49 million to $11.18 million. The lifetime limit continues to increase each year. Unless you're giving millions of dollars away, you're not likely to ever pay taxes on your gifts.
Note: the total limit may (and likely will) go down in the future with future tax reform.
Annual Gift Tax Exclusion Limits:
- 2024: $18,000
- 2023: $17,000
It should be noted that gifts to certain entities are already tax-free. These include:
- Nonprofit 501(c)(3) organizations
- Private schools (to pay for tuition expenses)
When you keep your gift to $17,000 per person, per year, there isn’t any paperwork involved. This makes gifting very simple. Once you go over the $17,000 limit, you’ll have to file IRS Form 709.
Who Pays Gift Taxes?
The person gifting pays taxes and files necessary paperwork when going over the $17,000 limit. The person receiving the gift does neither.
Gifting For Married Couples
Married couples generally have a combined tax return (here's when you should consider filing separately). Each of them is subject to the $17,000/yr limit. In other words, the IRS does not look at a married couple of one entity and limits them to $17,000 in total. Instead, their combined total is $34,000.
There is a method called splitting the gift that applies to married couples. For example, the father wants to gift $34,000 of property to his son. However, that’s $17,000 over the annual limit. The father goes to his wife and asks her to be a consenting spouse. In doing this, the wife basically hands over her $17,000 to the husband. Now the husband can gift $34,000 without reducing his lifetime limit.
Gifting Portions Of An Estate While Living
Let’s look at an estate planning example. John owns an estate that is worth more than $12.92 million. When John passes, his heirs will be subject to a 40% estate tax, at the federal level, on the amount above $12.92 million. What can John do to reduce the taxable amount of his estate?
Instead of gifting the majority of his estate on death, John can gift while he’s alive. $17,000 per person might not sound like much, but if John can gift to many people each year, it will add up fairly quickly.
There’s an additional benefit to giving while you're alive. By giving while you’re alive, you not only reduce the potential taxable amount of your estate, you’ll get far more joy out of it than if you were dead. You get to see the impact you gifting has on people’s lives. Think if you give $17,000 every year to a nephew who keeps saving for college and eventually earned his degree? You’ll know you played a big part in that.
Gifting Stocks While Living
Gifting stocks is just the opposite. Say a stock goes from $50 to $100. Anyone who inherits the stock upon your passing gets a $100 cost basis because of the step-up basis. If you gift it while alive, their cost basis will be $50. They pay a $50 long-term capital gain tax on each share. Not exactly a good deal.
Gift Tax Limit Workarounds
If the annual gift tax limit is $17,000, what does that mean when you want to gift to multiple people or give more than $17,000 to one person? The gift tax limit is per person, per year. So if you want to gift to three people, the total combined limit for all three is actually $51,000.
What if you want to gift $40,000 to one person? We already know you’ll hit the $17,000 limit. However, if your time frame allows, you can gift $17,000 near the end of the year and another $17,000 at the beginning of the following year. That’s a total of $34,000 to one person and it's almost as if they received the full $34,000 at once. Only $6,000 out of $40,000 now goes toward your lifetime limit.
You can take the above example even further. After gifting $34,000, if the person can wait one year, you’ll be able to gift the remaining $6,000 tax-free, assuming you haven’t gifted more than $11,000 during that year.
There are also workarounds, such as paying school tuition directly on behalf of a child or grandchild. By paying the money directly to the educational institution, it avoids all gift tax issues. This can be a great way to "give" your child or grandchild an education - whether K-12 or college.
The gift tax rules limit how much of one’s estate can be given away tax-free while they’re alive. Otherwise, people would be able to give away their entire estate tax-free. However, for many people, $17,000 per year will be plenty. For the rest, they have $12.92 million in 2023 before taxes kick in.
Looking for more ways to reduce your tax liability? Check out our complete list of the most common tax deductions that young people might miss one their tax forms. And if you're searching for tax software that blends powerful features with affordable prices, these are our favorite choices.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared toward anyone wanting to earn more, get out of debt, and start building wealth for the future.
Editor: Clint Proctor Reviewed by: Chris Muller