Gift tax is a tax imposed on the transfer of assets from one person to another without any monetary consideration or with consideration below the fair market value. While gift-giving is a common practice, it can have potential tax implications, and it’s essential to understand how gift tax works to avoid any surprises when it comes to filing your taxes. In this post, we’ll delve into the basics of gift tax and what you should be aware of as a giver or recipient of gifts.
1. Gift Tax Exclusion: The good news is that not all gifts are subject to tax. The United States, for example, allows for a gift tax exclusion, which means you can give a certain amount to each person each year without triggering any gift tax. For 2023, the annual gift tax exclusion is $17,000 per recipient. It means you could gift up to $17,000 to as many individuals as you want, and it wouldn’t be counted towards your lifetime gift tax exemption or be subject to gift tax.
2. Lifetime Gift Tax Exemption: In addition to the annual exclusion, there is a lifetime gift tax exemption. This exemption represents the total amount you can give away over your lifetime without owing any gift tax. However, it’s important to note that this exemption also applies to the estate tax. The gift tax and the estate tax share a unified lifetime exemption, which is $12.92 million per individual as of 2023. This means you can gift up to this amount during your lifetime without paying any gift tax. However, anything above this limit will be subject to gift tax.
3. Reporting Requirements: Even if your gifts fall within the annual exclusion and don’t require you to pay gift tax, you might still need to file a gift tax return (IRS Form 709). This form is necessary to keep track of the gifts you’ve made over the annual exclusion amount and to keep a running total of your lifetime gift tax exemption usage. Filing a gift tax return doesn’t necessarily mean you’ll owe any tax; it’s mainly an informational report for the IRS.
4. Gift Splitting: If you are married and file a joint tax return, you and your spouse can effectively double the annual exclusion amount. This concept is known as gift splitting. So, for the tax year 2023, a married couple could gift up to $34,000 to an individual without triggering any gift tax.
5. Education and Medical Exclusions: Gifts made for qualified education expenses and medical expenses are generally exempt from gift tax, regardless of the amount. However, to qualify, you must make the payment directly to the educational institution or medical service provider.
6. Gift Tax Rates: If you exceed both the annual exclusion and the lifetime gift tax exemption, you will be subject to gift tax. The gift tax rates vary depending on the year and may be subject to change by the government. In 2023, the top gift tax rate is 40%.
7. Consult a Tax Professional: Navigating the complexities of gift tax can be daunting, especially if you plan to make substantial gifts. It’s always a good idea to consult with a qualified tax professional or estate planning attorney to ensure compliance with the tax laws and make informed decisions about your gift-giving strategy. Remember, tax laws can change, and this post may not reflect the most current regulations. Always check with the latest IRS guidelines or consult a tax professional for up-to-date information on gift tax. Reach out to Mathew Finkelson-Reece, CPA MBA ABV (mreece@janus-curran.com) at Janus, Curran, Finkelson-Reece PLLC with any questions.
