The person who gives the gift is responsible for paying the gift tax, meaning you can give away this much in cash or property value each year without incurring a gift tax and without it counting toward your lifetime gift tax exclusion (called your “lifetime exemption”).
Gift Tax Exclusions and ATRA
The gift tax is designed to prevent individuals from giving away their wealth during their lifetimes in order to avoid estate taxes for their beneficiaries after they die. It’s been around for a while, but the American Taxpayer Relief Act of 2012—commonly known as ATRA—increased the top marginal tax rate on estate assets from 35% to 40%. ATRA also indexed the lifetime gift tax exclusion for inflation, so it increases periodically. The lifetime exclusion is $12.06 million for the 2022 tax year and $12.92 million for 2023. If you go over the annual exclusion amount, you can either apply this lifetime exclusion to the balance or pay the gift tax.
How the Annual Exclusion Works
If your daughter needs $25,000 for a down payment on a house and you give her that amount, you will owe the gift tax on $9,000—the balance over the $16,000 annual exclusion in 2022. On the surface, it’s that simple, but a couple of wrinkles can work to your advantage. Maybe your daughter asks you for the money in December, and she’s planning to close on the property in January. In this case, you can give her the money tax-free: $16,000 in December in one calendar year and $9,000 on January 1 of the next calendar year. The exclusion rolls over when the calendar does. You can even give your daughter the entire $25,000 in January—or any other month of the year—if you’re married.
How the Annual Exclusion Works for Spouses
Spouses can combine their annual gift tax exclusion amounts and give a total of $32,000 per recipient in 2022 ($34,000 in 2023) without incurring any gift tax liability. They must file gift tax returns for the year, however, reporting this to the IRS: Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
Other Gift Tax Exclusions
In addition to the annual exclusion gift, there are other forms of gifts that are not subject to the federal gift tax. A few more common examples include:
You can pay unlimited tuition or medical costs for an individual. Donations or gifts to political organizations are fully tax-exempt. Gifts made from one spouse to another (if the spouse is a U.S. citizen) are exempt from gift taxes due to the unlimited marital deduction.
