Do you ever wonder if giving your favorite nephew that shiny new car might attract more attention than just his admiration? Surprise! Uncle Sam loves gifts, too. And he is always in the corner with a calculator and a frown. Welcome to the curious case of gift tax, where generosity comes with a price tag! It is the IRS’s way of reminding us that no good deed goes unpunished… sorry, untaxed. Okay, jokes aside, let’s unwrap everything you need to know about gift tax in 2024, how much it is, and who pays it.
What is a Gift Tax?
A gift tax is a federal tax that the IRS charges when you give someone property or money without receiving anything or payment of equal value in return. Gifts can be anything from cash, real estate, stocks, or other valuable items. Uncle Sam specifies a limit on how much you can give as a gift each year. If the value of your gift exceeds this limit, you must report it, and it counts toward your lifetime gift tax exemption (more on this later). If you go over your lifetime limit, you will have to pay the gift tax.
Who Pays Gift Tax
Usually, you don’t have to worry about paying a gift tax on whatever gift you get from your loved ones. It’s the giver of a gift, not the recipient, who might need to file a gift tax return. It is understandable if you think the concept of gift tax sounds like a punishment for kindness.
Note: In some instances, the receiver can agree to pay the gift tax instead of the giver. However, it would be in your best interest to consult a tax expert before making this option.
What Counts as a Gift?
As stated earlier, whenever you give something valuable without getting any or less than equal value in return, it is a gift. If you give away a Rolls Royce worth $700,000 to your child and you receive $200,000 back from him, the $500,000 difference is a gift. Remember, selling is different from gifting, so you have to be very careful about it and clear with the fundamentals.
There are exceptions, though. For example, gifting your spouse has zero gift tax implications, but this is limited to spouses. Gifting to charitable organizations approved by the government is a different ‘gift’ than the gift we are talking about. Such gifts are technically called Charitable Contributions.
The following are examples of other gifts that are not subject to gift tax:
- Payment of certain fees on behalf of family or friends.
- Payment of certain expenses on behalf of your friends.
- Gifting money to your kid for the down payment on their new home, investment, etc.
Understanding these basics can help you gift more strategically!
Gift Tax Annual Exclusion and Lifetime Exemption
Earlier, we mentioned the term ‘lifetime gift tax exemption.’ It is time to give you the breakdown. Alongside gift tax annual exclusion, the lifetime exemption is a kind of cheat code that you can use to avoid paying gift taxes legally. Let’s discuss how.
What is the Gift Tax Annual Exclusion?
Most people never have to pay gift tax, thanks to annual and lifetime exclusions. The annual exclusion is the annual gift limit you can give without tax return filing obligations.
For the tax year 2023, you can give up to $17,000 to one person without having to file a gift tax return. For 2024, the amount is $18,000. So, if you give someone $20,000 in 2024, you will need to file a gift tax return for $2,000, which is the amount over the $18,000 limit.
The annual exclusion applies per person, so you can give $18,000 to as many people as you like in 2024 without having to file. As a married couple, you and your partner can each give $18,000 to the same person, totaling $36,000, before needing to file a return.
What is the Gift Tax Lifetime Exemption?
Thanks to the gift tax lifetime exemption, you might not have to pay a dime even if you file a gift tax return. The lifetime exemption is the total amount you can give over your lifetime before you pay gift taxes. For 2023, the lifetime exemption is $12.92 million, and for 2024, it’s $13.61 million.
For example, if you gave someone $20,000 in 2024, you’d file a gift tax return for $2,000, the amount over the annual exclusion. The $2,000 counts toward your lifetime exemption. So, if you haven’t given away more than $13.61 million in total gifts over your lifetime, you won’t pay taxes on that $2,000.
Any gifts that count against your lifetime exemption also reduce the amount your estate can be worth before it has to pay estate taxes. For example, if you give away $3 million more than your annual exclusions during your life, this counts against your $13.61 million lifetime exemption. If you pass with $9.92 million left, any part of your estate over this amount would be taxed.
We know there’s a sting of exhaustion that comes with the idea of losing the fruits of your sweat to Uncle Sam even after your passing. But the good news is that there are provisions within the U.S. tax code that allow you to exercise your generosity without getting tangled up in more tax bills, including posthumous ones!
Parting Note
If you are wondering if you now have to stop gifting to avoid tax bills with higher digits, the answer is NO. But do you need to approach gifting with a solid tax strategy that protects your wealth? BIG YES! And yes, we know it’s more likely to find snow in the summer than to become an overnight tax strategist. Nevertheless, you can get insider tax strategy tips that will help you save big from our world-class tax experts, led by a top 1% U.S. tax strategist!
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