What Is the Gift Tax?

The gift tax is a federal tax levied on individual taxpayers who transfer money or property to another person without receiving something of equal value in return.

Understanding how the gift tax works and the allowed limitations can help you prevent an unexpected tax bill after giving money or property to a family member or friend.

 

How Does the Gift Tax Work?

The gift tax prevents large transfers of wealth without any tax implications. While the giving and receiving of ordinary gifts is not typically affected by this tax, a person who gives large sums of cash or property over the annual limit set by the IRS may need to consider their gift tax liability.

 

What is the Gift Tax Limit for 2023?

For 2023, the annual gift tax limit is $17,000 per giver per recipient. That means you can give cash or property up to a value of $17,000 to several different individuals without having to file a gift tax return.

The gift tax only becomes a concern if you give one person cash or property totaling more than $17,000, called the "gift tax exclusion," during a calendar year.

For example, say you want to gift money to your children. If you have three children and you give each of them a gift of $17,000 in 2023, you will be able to give away $51,000 in total without paying any gift tax. But if you just gave one child all $51,000, that amount would be subject to the gift tax.

In that case, you would file a gift tax return for $34,000, the amount of your gift that was over the annual $17,000 exclusion. However, just because you file a gift tax return doesn't mean you'll owe gift taxes for that tax year. That's because every taxpayer also gets a lifetime exemption for gifts.

 

Lifetime Gift Tax Exclusion

Not only does the IRS allow taxpayers to give away up to $17,000 per recipient anually without paying a gift tax, but it also allows for a lifetime gift tax exclusion. The lifetime gift tax limit is $12.92 million in 2023.

When you give a gift that is larger than the annual gift tax limit, you must report to the IRS the amount of the gift that is over the limit. To do this, you need to file Form 709 with your tax return for the tax year in which the gift was given.

If you haven't reached the lifetime gift tax exclusion limit, you won't have to pay a gift tax for that year. But as the amounts included on your Form 709 add up over the years, if you eventually reach the limit of $12.92 million, you will then have to pay the federal gift tax on any gifts or property that exceed that limit.

The lifetime gift tax exclusion applies to gifts that a person gives while they are living, as well as property left to heirs upon the person's death. So, if a deceased individual leaves behind a large estate, there's a chance that their lifetime gift tax exemption usage will be an important factor for those who inherit it.

What Is Included in Gift Tax?

To keep track of whether you are liable for the gift tax, it's important to understand how the IRS defines “gift." Basically, a gift includes any transfer of valuable property in which the giver receives nothing equal to the value of the gift.

Property that can be included for gift tax includes:

• Cash.
• Real estate.
• Vehicles.
• Works of art.
• Securities such as stocks, bonds and mutual funds.

What Is Excluded From Gift Tax?

There are some types of gifts that are completely excluded from gift tax liability.

Wealth transfers that are excluded from gift tax include:

• Educational expenses for someone else.
• Medical expenses for someone else.
• Gifts to a spouse.
• Gifts and donations to political organizations.

 

Who Pays Gift Tax?

The giver of the gift generally pays the gift tax, and they do this by filing a gift tax return for the tax year in which the gift was given.

Typically, the receiver is not required to pay gift tax. However, if you are the person receiving a gift, you can choose to pay any gift tax for the giver.

 

How to Calculate Your Gift Tax

Because of the lifetime gift tax exemption, most Americans will never have to pay the gift tax. But high-net-worth individuals who will have more than the lifetime limit to give away should consider the gift tax during estate planning.

After reaching the lifetime exclusion limit, taxes will be due on gifts that surpass the annual exclusion limit ($17,000 in 2023). Similar to federal income tax, gift tax rates are marginal, starting at 18%, with the top rate at 40%. The percentage an individual pays is adjusted based on the size of the gift.

The following brackets show how to calculate your gift tax liability:

Taxable amount exceeding annual gift exclusion limit	Gift tax rate
$0 - $10,000	18%
$10,001 - $20,000	20%
$20,001 - $40,000	22%
$40,001 - $60,000	24%
$60,001 - $80,000	26%
$80,001 - $100,000	28%
$100,001 - $150,000	30%
$150,001 - $250,000	32%
$250,001 - $500,000	34%
$500,001 - $750,000	37%
$750,001 - $1,000,000	39%
$1 million +	40%

 

If you want to give away large amounts of assets to children, grandchildren or others, there are several strategies you can employ, such as:

Annual Gift Tax Exclusion

Start by making gifts that fall under the annual gift tax exclusion, which allows you to give up to $17,000 per individual per year.

There is no aggregate limit to how many times you can use the annual gift tax exclusion in one year, so you can give up to $17,000 to as many individuals as you wish without tax liability.

For example, if you have three children and each child has a spouse, you could give each child and their spouse $17,000 individually in 2023. Your total gifts of $102,000 would not be taxable because the six gifts fell under the annual exclusion.

Education & Medical Gifts

There is no limit to the amount you can give away for educational expenses or medical expenses. Consider lowering your estate's tax liability by giving funds for college tuition to your grandchildren, for example. To qualify as tax-exempt, the funds must be paid directly to an educational institution.

For medical gifts to qualify for the unlimited tax exclusion, the funds must be paid directly to the medical provider rather than as a reimbursement to your child, grandchild or other recipient.

Lifetime Gift Tax Exclusion

Finally, any gifts that are not exempt from taxes and go over the annual gift tax exclusion can avoid tax through the lifetime gift tax exclusion. Each year that a gift is made that does not qualify for exemption, file a Form 709 to report the portion that is not excluded. If your lifetime total remains below the lifetime exclusion amount ($12.92 million in 2023), those gifts will not be taxed.