Quick Answers
The IRS allows individuals to give up to $16,000 per year in gifts without paying gift taxes or needing to report the gift. Married couples can give up to $32,000 per year gift tax free. There is also a lifetime gift tax exemption of over $12 million that allows individuals to give over the annual limit in a lifetime before gift taxes apply.
What is the Annual Gift Tax Exclusion?
The IRS allows individuals to give a certain amount each year without having to pay gift taxes or report the gifts. This is known as the annual gift tax exclusion.
For 2022 and 2023, the annual gift tax exclusion amount is $16,000 per individual donor. That means each individual can gift up to $16,000 to as many people as they want gift tax free.
Married couples can combine their individual $16,000 exclusions to give $32,000 tax free from the couple to each recipient.
Gifts up to the annual exclusion amount do not need to be reported to the IRS. Any gift over $16,000 to a single recipient in a year must be reported on Form 709.
Key Facts on the Gift Tax Exclusion
- The annual exclusion is per donor, not per recipient. One donor can give multiple people up to $16,000 each.
- The annual exclusion amount may be adjusted for inflation in future years.
- Gifts between spouses do not count towards the annual exclusion.
- Tuition payments or medical payments made directly to institutions do not count towards the $16,000 annual exclusion.
- Gifts to political organizations and most charities are not subject to gift taxes.
When Do You Have to Report Gifts to the IRS?
Any gift over $16,000 to a single recipient in a year must be reported to the IRS using Form 709. This is known as a “taxable gift.”
Reporting the gift does not necessarily mean you owe gift taxes. It just provides information to the IRS to track your lifetime gift tax exemption.
For example, if you give your daughter $20,000 to help with a down payment on a house, you would need to report the gift on Form 709 since it exceeds the $16,000 annual exclusion. But you may not actually owe any gift taxes if it falls under your lifetime exemption.
When Do You Owe Gift Taxes?
You only owe gift taxes if the total taxable gifts you make in your lifetime exceeds the lifetime gift and estate tax exemption.
This lifetime exemption is very generous. For 2022 and 2023, the federal lifetime exemption is $12.06 million per individual. So a married couple can gift over $24 million tax free.
Unless you are gifting assets worth millions of dollars, you likely will never have to pay actual gift taxes. But you do still need to properly report gifts over $16,000 per year per recipient.
What Types of Gifts Do Not Count Towards the Annual Exclusion?
There are a few exceptions to the kinds of gifts that count against the $16,000 annual exclusion:
- Gifts to spouse – There is an unlimited marital deduction. You can give any amount to your spouse gift tax free.
- Medical expenses – Payments made directly to a medical provider do not count towards the annual exclusion.
- Educational expenses – Tuition payments made directly to an educational institution are not subject to gift taxes.
- Political donations – Gifts to political organizations are not taxable.
- Charitable gifts – Most donations to qualifying charities are deductible and exempt from gift taxes.
So gifts like paying your child’s college tuition or your parent’s doctor bills would not reduce your $16,000 annual exclusion.
Can You Gift Appreciated Stock Tax Free?
Gifting appreciated investments like stock is a smart tax strategy. When you gift the stock directly, the recipient takes on the cost basis you had.
This means they avoid paying capital gains taxes on any gains that occurred while you owned the investment.
For example, say you purchased $5,000 worth of stock years ago that is now worth $16,000. If you sold the stock, you would owe capital gains taxes on the $11,000 gain.
Instead, you can gift the appreciated stock to a family member. They take on the $5,000 cost basis and would only owe taxes on gains going forward. Essentially, the capital gains tax on the $11,000 is avoided.
Up to the annual $16,000 gift tax exclusion, appreciated stock can be gifted tax free without needing to report it. But for larger gifts the value of the asset counts towards your lifetime exemption.
Reporting Gifted Appreciated Assets
If you gift appreciated assets worth more than the annual exclusion, you need to report it to the IRS. The gift value reported is the fair market value on the date the gift was given.
So in the example above, the $16,000 in gifted stock would need to be reported since it exceeds the $16,000 exclusion threshold. Even though the cost basis was only $5,000, the gift value reported to the IRS is the full $16,000 market value.
Are There Exceptions for Education and Medical Expenses?
There are exceptions to the gift tax rules when money is gifted specifically for education or medical expenses.
Known as the “gift tax education exclusion” and “gift tax medical exclusion”, these allow you to make tax free gifts over the annual limit that are paid directly to medical or educational service providers.
For example, if you paid $30,000 directly to your child’s college, the full amount would be exempt from gift taxes, even though it exceeds the $16,000 annual exclusion.
The same is true for paying an assisted living facility or medical provider for someone’s care. There is no limit to these exceptions as long as the payments are made directly to the institutions. Funds given to the individual first do not qualify.
529 Plan Contributions
Contributing to a 529 college savings plan also qualifies for the education gift tax exclusion. You can contribute a lump sum up to the next 5 years’ worth of annual gift tax exclusions and spread it over 5 years.
For example, in 2022 a married couple could contribute $160,000 to a child’s 529 plan (5 x $32,000 annual exclusions) gift tax free. The contribution would count equally over 2022-2026 on Form 709 reporting.
Unified Lifetime Gift and Estate Tax Exemption
The IRS provides a very generous lifetime exemption amount that allows gifting and estate planning in excess of the annual limits tax free.
In 2022 and 2023 this unified exemption is $12.06 million per individual. Married couples can use both their exemptions for a combined $24.12 million.
The exemption means an individual can gift up to $12 million in their lifetime without owing any federal gift taxes. Or they could gift $6 million and leave $6 million to heirs estate tax free at their death. The $12 million can be used in any combination.
Very few Americans ever reach the lifetime exemption limit. It provides substantial flexibility for estate planning and gifting money to loved ones tax free even above the annual exclusions.
Portability of Exemption Between Spouses
Married couples can make use of a provision called “portability” that allows spouses to share their exemption.
If the exemption of the first spouse to pass away is not fully utilized, the remaining amount can be “ported” over to the surviving spouse.
For example, if a husband gifted $6 million while alive and dies, his remaining $6 million exemption could be transferred to his wife. This would give the wife up to $18 million in lifetime exemption including her own $12 million.
Portability provides flexibility for married couples to fully leverage both spouses’ gift and estate tax exemptions.
Gift Taxes and the Generation Skipping Transfer Tax
There are special rules when gifting to grandchildren or recipients who are more than one generation below you. This is known as the generation-skipping transfer (GST) tax.
In 2022 and 2023, individuals have a $12.06 million GST tax exemption they can utilize over a lifetime. Gifts made from grandparents to grandchildren over the annual gift exclusion that exceed this GST exemption will incur a 40% flat tax at the time of the gift.
For example, if grandparents gift $20 million directly to a grandchild, the amount over $12.06 million would be subject to the GST tax.
It is important to consider the GST tax rules when gifts are made skipping the generation below you. Proper planning, such as utilizing each grandparent’s annual exclusions and GST exemptions, can minimize this added tax.
Gift Splitting
Married couples have the advantage of being able to “gift split” to maximize use of annual exclusions and lifetime exemptions.
Gift splitting allows you to combine your $16,000 annual exclusion into one gift from both spouses. So together a married couple can give $32,000 annually to any recipient gift tax free.
Spouses can also split gifts that exceed the annual exclusion to leverage both exemptions. Gift splitting must be elected by filing Form 709 and depends on consent by both spouses.
Proper gift splitting allows married couples to efficiently double their annual tax-free gifting and make full use of current lifetime exemptions.
Reporting Gifts on Form 709
As mentioned, you must file Form 709 to the IRS to report any gifts that exceed the annual $16,000 exclusion.
Even if no gift tax is due, reporting is required for the IRS to track use of your lifetime exemption.
Form 709 must be filed by April 15th in the year after the gift was made. So for a gift given in 2022, the form would be due by tax day in 2023.
The form requires reporting the following gift details:
- Name, address, and tax ID of gift recipient
- Description and fair market value of assets gifted
- Date the gift was provided
Form 709 can be completed by the gift giver or with help from a tax professional or attorney. Accurately tracking and reporting gifts is vital for staying compliant with IRS regulations.
What Happens if You Go Over Your Lifetime Exemption?
If you should exceed the generous $12 million lifetime gift and estate tax exemption, a federal gift tax of 40% would apply. This tax is the responsibility of the gift giver.
For example, if you gifted $13 million in your lifetime as a single filer, you would owe gift taxes on the $1 million that exceeded the exemption limit. At a 40% rate, $400,000 in gift taxes would be owed.
The 40% gift tax rate is the same rate that applies to estate taxes. It is a flat federal tax paid directly by the gift giver or estate.
Some states also charge state level gift and estate taxes at much lower exemption thresholds, so state taxes may come into play first.
Using Unified Credit to Pay Gift Taxes
The federal gift tax owed can be paid using your unified gift and estate tax credit. This credit essentially covers tax owed on your first lifetime exemption used.
So in the example above, the $400,000 in gift taxes could be paid using the unified credit since the lifetime exemption was exceeded. No actual out of pocket tax may be due if the credit covers it.
Proper planning and tracking of gifts relative to exemptions allows you to minimize situations where actual gift taxes would ever become due.
Can Gift Recipients Owe Income Tax on Gifts?
While gift givers are responsible for any potential gift taxes, recipients of gifts do not owe gift tax or owe income tax on the gift amount.
However, recipients do need to consider the tax basis they receive in the gifted assets and may owe capital gains taxes if sold.
For gifted cash, the basis to the recipient is the amount gifted. For appreciated property, the recipient receives the same basis you had as the original owner.
So if stock worth $20,000 was gifted but had a $10,000 cost basis, the recipient takes on that lower basis. If they immediately sold the stock, capital gains taxes would apply on the $10,000 gain.
Certain transfers for estate planning, like gifts to irrevocable trusts, may be subject to income tax. Recipients should understand the tax implications before accepting such gifts.
Conclusion
Knowing the gift tax rules and exclusions allows you to gift money to loved ones tax efficiently during your lifetime. Taking advantage of the annual exclusion, education and medical exceptions, and the generous lifetime exemption means you can gift substantial assets now without incurring gift taxes. Just be sure to properly file Form 709 when required to disclose taxable gifts to the IRS. With some planning, you can minimize taxes and maximize the assets you transfer to the next generation.