You've put in the effort and achieved financial stability, and now you want to share your success with your loved ones by giving them generous gifts. However, you might be concerned about the potential penalties and complexities involved in giving large amounts of money to others. Here are some common misunderstandings and important factors to think about before sharing your wealth.Related: 529 Tax Benefits
1. Who Pays the Gift Tax?
Despite what many people think, the person receiving a gift isn't usually the one who has to pay the gift tax. Instead, it's typically the person who gives the gift who is subject to the tax. This only happens, though, if the value of the gift is more than the current annual gift exclusion. The person getting the gift doesn't have to worry about paying the tax — unless the person giving the gift doesn't pay it or report it properly.
2. Annual Gift Exclusion: $18,000 Per Person
In 2024, you're allowed to give someone up to $18,000 per year without having to report it to the IRS. If you're married, you and your spouse can give up to $36,000 to the same person without worrying about gift taxes. But if you give more than this amount, you'll have to fill out IRS Form 709 to report the extra gifts you've given to that person during the year.
3. Types of Gifts and Documentation
Gifts aren't just about giving money; they can also include real estate, stocks, cars, art, or collectibles. If the value of a non-cash gift goes over $18,000, you need to give the IRS proof of its fair market value. This might mean getting a professional appraisal. Some gifts, like donations to political groups or paying medical or tuition bills, might not need to be reported for gift-tax purposes.
4. Lifetime Gift Tax Exclusion: $13.61 Million
For most people, gift taxes aren't a big concern because of the personal lifetime gift tax exclusion, which is currently set at $13.61 million. This means you can give more than $18,000 to one person without paying gift taxes, as long as these gifts stay within your lifetime exclusion limit. However, it's worth remembering that this exclusion also counts toward your estate tax, which could have an impact on your overall estate planning.
5. Estate Tax Implications and Future Considerations
The current exclusion limit of $13.61 million applies to both gift and estate taxes. This limit is set until 2025, but it's possible that future laws or administrations could change it. It's also important to consider state-specific rules, since some states have lower limits for lifetime exclusions, which could affect your estate-planning decisions.
Virginia529 does not provide tax, legal or investment advice.Consult your tax, legal or investment advisor for more information about your specific tax situation and tax consequences.
FAQs
Annual Gift Exclusion: $18,000 Per Person
In 2024, you're allowed to give someone up to $18,000 per year without having to report it to the IRS. If you're married, you and your spouse can give up to $36,000 to the same person without worrying about gift taxes.
What are tax rules on gifts? ›
Annual gift tax exclusion
The gift tax limit is $17,000 in 2023 and $18,000 in 2024. Note that this annual exclusion is per gift recipient.
What are the gift tax situations? ›
The annual exclusion is per recipient, not the sum total of all your gifts. That means, for example, that you can gift $18,000 to your cousin, another $18,000 to a friend, another $18,000 to a neighbor, and so on in 2024 without having to file a gift tax return in 2025.
Who benefits from the gift tax? ›
In addition to the removal of the value of the gift tax paid from the donor's taxable estate, the payment of the gift tax also provides an income tax benefit to the beneficiary. Generally, the donor's basis is carried over to the donee upon receipt of the gift.
What is the reason for the gift tax? ›
The federal gift tax exists for one reason: to prevent citizens from avoiding the federal estate tax by giving away their money before they die. The gift tax is perhaps the most misunderstood of all taxes. When it comes into play, this tax is owed by the giver of the gift, not the recipient.
Who actually pays gift tax? ›
The donor is generally responsible for paying the gift tax. Under special arrangements the donee may agree to pay the tax instead.
How does the IRS know if I give a gift? ›
The primary way the IRS becomes aware of gifts is when you report them on form 709. You are required to report gifts to an individual over $17,000 on this form. This is how the IRS will generally become aware of a gift.
What gifts are excluded from the gift tax? ›
Which gifts are exempt from the federal gift tax?
- Gifts to IRS-approved charities.
- Gifts to your spouse (assuming they are a US citizen)
- Gifts covering another person's medical expenses, as long as you make the payments directly to medical service providers.
In California, for example, the aggregate 529 plan balance limit is $529,000. “Donors can gift up to $15,000 each year to each beneficiary under the annual gift tax exclusion, including into a college savings fund for that beneficiary," said Goldman.
How do I avoid gift tax? ›
6 Tips to Avoid Paying Tax on Gifts
- Respect the annual gift tax limit. ...
- Take advantage of the lifetime gift tax exclusion. ...
- Spread a gift out between years. ...
- Leverage marriage in giving gifts. ...
- Provide a gift directly for medical expenses. ...
- Provide a gift directly for education expenses. ...
- Consider gifting appreciated assets.
The amount of the gift tax payable in the current year is determined by computing the tentative tax on all taxable gifts for the current calendar year and each preceding period, less the tentative tax on all taxable gifts for each of the preceding periods.
Can I gift anyone money? ›
The annual gift tax exclusion of $17,000 for 2023 is the amount of money that you can give as a gift to one person, in any given year, without having to pay any gift tax. You never have to pay taxes on gifts that are equal to or less than the annual exclusion limit.
What is the IRS gift limit? ›
Bottom Line. Understanding the ins and outs of the federal gift tax can be important for the wealthy and generous, but most Americans will never face this tax. That's because the IRS allows you to give away up to $18,000 in 2024 and $17,000 in 2023 in money or property to as many people as you like each year.
Is a $10,000 gift to a family member tax deductible? ›
There is typically a tax-free gift limit to family members until a donation exceeds $15,000 (jumping up to $16,000 in 2022). In these instances, the IRS is usually uninvolved. Even then, it can just result in more paperwork. At the federal level, assets you receive as a gift are usually not taxable income.
What happens if you don't report a gift to the IRS? ›
If you don't file the gift tax return as you should, you could be responsible for the amount of gift tax due as well as 5% of the amount of that gift for every month that the return is past due.
What is the highest gift tax? ›
Like federal income tax, gift tax rates are marginal, with the top rate reaching 40%. The larger a gift is, the more a person will potentially pay in taxes. But remember, you don't have to pay gift taxes until someone exceeds their lifetime exemption.
What is the history of gift tax? ›
The gift tax was first enacted in 1924, repealed in 1926, overhauled and reintroduced in 1932. It raised $1.9 billion in tax revenues in fiscal year 2006, down from a peak of $4.6 billion in revenues it raised in fiscal year 1999, before the recent phased-in tax rate reductions.
What is the highest gift amount without taxes? ›
What is the gift tax exclusion? The basic gift tax exclusion or exemption is the amount you can give each year to one person and not worry about being taxed. The gift tax exclusion limit for 2023 was $17,000, and for 2024 it's $18,000.
Can my parents give me $100,000? ›
Can my parents give me $100,000? Your parents can each give you up to $17,000 each in 2023 and it isn't taxed. However, any amount that exceeds that will need to be reported to the IRS by your parents and will count against their lifetime limit of $12.9 million.
