Clients often ask me about how much money they’ll have to pay in taxes if they give or receive money from family.
The IRS guidelines are a little misleading, so in today’s post, I’ll break down the tax rules related to family gift-giving.
What is gift tax? What is a gift?
In the United States, we have gift tax that applies to amounts over a certain limit (more on that in a bit). The IRS defines a gift as any transfer of money or tangible items from one person to another without getting “money or money’s worth” in return. The IRS has rules explaining when and how much gift tax will be collected.
What isn’t a gift?
Additionally, the IRS has rules about what isn’t a gift. In general, these gifts are excluded from gift tax:
- Gifts that do not exceed the annual exclusion limit.
- Gifts to pay for tuition or medical expenses (should be paid directly to the institution).
- Gifts to your spouse.
- Gifts to a political organization.
Also, don’t forget that gifts to charities are often deductible.
Who pays gift tax, the giver or receiver?
Tax rules and gift tax typically apply to the person giving the gift unless some other formal arrangements have been made. So if you’re thinking about giving large amounts of money or property to a family member, you don’t have to worry about them being on the hook for income tax on that money or the value of those items.
How much can I give before I have to pay gift tax?
Here’s where people often get confused. What you need to remember is that when you’re gifting money to family members (or anyone for that matter), you have to give a big amount before the gift would trigger gift tax.
The reason this is confusing is that there is something called an “annual exclusion” limit. Understandably, when people hear this term, they think that means once they give more than the annual limit, they have to pay taxes on that money. However, that is not how the annual exclusion limit works.
First of all, the annual exclusion limit applies to each recipient. Let me give you an example: Let’s say the annual exclusion is $18,000. In this case, you can give $17,999 dollars to however many different people you want without exceeding the limit.
And, if you’re married, your spouse can also give $17,999 to however many people they’d like (even the same people!) without either one of you exceeding the limit. This is often referred to as “gift splitting.”
Second, even if you do go over the annual exclusion limit, that doesn’t mean you have to pay gift tax. It only means that you’ll have to report the gifts to the IRS by filling out Form 709 and submitting it with your annual tax return. This way, the IRS will keep track of how much you’ve gifted, and they’ll be waiting to collect if you exceed the lifetime limit.
The only time you’ll have to pay gift tax is if you exceed the lifetime limit, which in 2024 is $13.61 million. This is why the vast majority of people never have to pay gift tax.
Side note: Starting in 2026, the lifetime limit is set to drop down to $5 million, which is what it was prior to 2018. Even then, most people will not exceed the reduced lifetime limit.
What are the annual exclusion limit amounts for gifts?
When looking at the annual exclusion numbers, remember:
- Exceeding these amounts only means that you’ll need to submit Form 709 (not pay taxes on the gift).
- The annual exclusion amount is per recipient.
| Tax Year | Gift Tax Annual Exclusion Amount |
|---|---|
| 2018-2021 | $15,000 |
| 2022 | $16,000 |
| 2023 | $17,000 |
| 2024 | $18,000 |
Do states have gift taxes?
In 2024, Connecticut is the only state that imposes a gift tax, and Connecticut’s gift tax laws are generally the same as the IRS.
Why is there a gift tax if hardly anyone pays it?
The gift tax was enacted to stop the ultra-wealthy from avoiding estate tax by gifting their money and property to their heirs before their death.
Abridged by Amy
While there are tax rules surrounding gifting money and property to your family, they won’t affect most taxpayers. However, before you start giving it all away, it’s always a good idea to speak with a certified public accountant or financial adviser to make sure you have a strong financial plan in place that accounts for living expenses and taxes now and in the future.
