Tis the season of giving and sharing! But did you know that giving gifts during your lifetime may subject you to a federal tax? But don’t be discouraged to give because it would take millions worth of gifts before the Internal Revenue Service (IRS) will go running after you for taxes.
Although you may not owe taxes yet on gifts, you may be required to file a gift tax return if your generosity reached a certain limit.
What is Gift Tax?
Gift tax is a federal tax on the transfer of property (including money) to another while receiving nothing or less in return. The donor generally pays this tax, and it ranges from 18% – 40% depending on the value of the gift.
Annual Gift Limit
One of the yearly inflation adjustments for 2024 is the increased annual gift limit to $18,000 ($17,000 in 2023). This simply means that you can be generous and give up to this amount tax and document free.
The annual gift limit applies per receiver. Therefore, you can give your friend, sibling, and favorite cousin up to $18,000 each, for a total of $54,000 still free of tax.
Being married is also a plus since each spouse is entitled to the annual gift limit. This effectively gives couples a combined gift limit of up to $36,000 per person in 2024.
What Happens if You Exceed the Annual Limit?
Exceeding the annual gift limit will not automatically mean owing taxes to the state. You will have to use up your lifetime gift tax exemption first before the IRS will start computing for taxes.
The lifetime gift tax exemption refers to the total amount of properties that an individual can give away without incurring federal taxes. The IRS updates the lifetime exemption for 2024 to $13.61 million ($12.91 million in 2023).
Any gift value that exceeds the annual limit will reduce your lifetime gift tax exemption balance.
Say for example in 2024, you gave your grandchild a brand-new car worth $23,000 as a graduation gift. The $5,000 excess gift value ($23,000 less $18,000) will decrease your lifetime gift tax exemption to $13,605,000.
Although exceeding the annual limit for gifts may not mean tax liability yet, you are required to file a federal gift tax return (Form 709) and submit it with your annual return. The IRS uses this report to monitor your lifetime gift tax exemption balance and check when you will start to owe them gift taxes.
It is important to note that your lifetime gift tax exemption also applies to your properties after death. You may want to include this in your estate planning, especially if you are looking at a considerable number of estate properties.
Are All Gifts Taxable?
Aside from keeping your gifts below the allowable limit for each calendar year, the following gifts will not be subject to tax according to the IRS:
- Charitable donations to qualified organizations.
- Tuition fees for someone else, paid directly to the school.
- Medical expenses for someone else, paid directly to the hospital.
- Gifts to a political organization for its use.
- Gifts to your spouse. However, if your spouse is not a U.S. citizen, your tax-free gifts are subject to an annual limit, $185,000 for 2024 ($175,000 for 2023).
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