In brief, the IRS is not imposing a tax on the sweater you gave to Uncle Arnold for Christmas or those Amazon gift cards you gave your nieces. The IRS only starts taxing gifts when they surpass a certain dollar limit each year and during your lifetime. And gift taxes generally only hit the very wealthy.
First, understand what a “gift” means to the IRS. It’s any transfer to a person where “full consideration” is not received in return. In short, the government sets a limit on the amount you’re allowed to “gift” to any person during the year without any tax impact.
There are tax planning steps you can take to minimize or even avoid gift taxes? If you stay below that annual limit, called an “exclusion,” you won’t have to pay a tax on the gift; if you exceed the limit, the gift tax kicks in. Remember, the donor, not the recipient, pays the gift tax.
From 2002 to 2005, you could give gifts of up to $11,000 per recipient each year; by 2022, that number had jumped to $16,000. Starting in 2023, the exclusion is $17,000. That means you can give away that amount without those gifts counting against your lifetime amount. Note that is for each recipient. So in 2023, you can give $17,000 to each of your three children and six grandchildren without triggering any tax effect. Couples have an even better deal, so the limit doubles: A married couple can give each of their children and grandchildren double the amount since each member of the couple is entitled to the exclusion.
Over the limit — what then?
Exceeding the annual limit doesn’t mean the gifts you gave will necessarily be taxed. Once you go over, another calculation kicks in. Over the course of a lifetime, a person can take a “lifetime exclusion” — the amount exempted from federal gift and estate taxes. In 2023, that amount is $12.92 million. So, let’s say in 2023, as an individual, you give someone a $20,000 gift. You do not immediately have to pay a tax on that. However, the $3,000 above the annual limit is subtracted from that $12.92 million. If you are among the very wealthy, there’s a chance you may use that up over your lifetime. Only then will you pay the gift tax.
Also, know that not every gift is taxable. These gifts are tax-exempt:
- Tuition and medical expenses.
- Gifts to your spouse.
- Gifts to a political organization.
Chances are you won’t ever owe the gift tax. However, if you are in a position to give substantial sums of cash or property, work with a tax professional to find out if you have a tax obligation. Even if you don’t owe tax, you may be required to submit certain forms to report the gifts, and a tax pro can advise you on this as well.
If you have any questions about these topics or others, please get in touch with one of our experts.
At Vrakas CPAs + Advisors, we strive to take financial worry off business owners’ plates so they can concentrate on running their businesses, serving their customers, and staying ahead of their competition.