What Is a Gift Tax?
A gift tax is a federal tax imposed by the Internal Revenue Service (IRS) on individual taxpayers who transfer property to someone else without receiving anything of substantial value. A gift can include cash, real estate, and other forms of property. The IRS limits how much can be transferred to someone as a gift. Any amount over this threshold must be reported and applied toward a lifetime gift tax exemption.
Key Takeaways
- The gift tax is a federal tax levied on a taxpayer who gives money or property to someone else.
- A gift is anything of substantial value, such as cash and real estate, for which the donor doesn’t get anything in return.
- IRS limits define how much taxpayers can gift to others annually and over their lifetime without incurring the gift tax.
Defining a Gift
A gift is anything of value that is transferred from one individual to another. According to the IRS, the transfer may occur “either directly or indirectly, where full consideration is not received in return.” To prevent people from avoiding paying income taxes, the federal government created the federal gift tax. This tax prevents undue hardship and obliges donors and recipients to honor their tax liability to the IRS. The following table shows what constitutes a gift:
| Gifts vs. Non-Gifts | |
|---|---|
| Included as a Gift | Excluded from Gifts |
| Cash | Educational expenses for someone else |
| Securities, such as stocks and bonds | Medical expenses for someone else |
| Real estate and vehicles | Gifts to a spouse |
| Art | Gifts and donations to political organizations |
IRS Limits
The IRS sets limits to how much people can gift annually and during their lifetime. In 2024, individuals can give up to $18,000 to one or multiple people without being taxed.Someone with three children can gift as much as $18,000 per child for a total of $54,000, without needing to pay a gift tax for the year. The lifetime limit for gifting is $13.61 million for 2024.
A married couple, filing jointly, can transfer up to $36,000 in 2024. Couples are taxed if they exceed the annual exclusion limit and that amount counts toward their lifetime limit. As a donor, individuals report any gifts by filling out Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return even if the gift falls under the annual limit and is untaxable. This form must be attached to an annual tax return by the tax filing deadline of the year after the gift was made, which is typically April 15.
Gift tax rates are based on the size of the taxable gift and can range between 18% and 40%. In cases where the value is not immediately evident, such as art or stocks, taxpayers use the fair market value (FMV) of the asset to assess their tax liability.
A generation-skipping transfer tax (GSTT) of 40% is levied when a gift over a certain amount is given to someone 37½ years younger than you. That limit is the lifetime exclusion, which is $13.61 million for 2024.
Gift Tax Strategies
- Gift Splitting: The annual exclusion applies to the amount of gift an individual can give someone else. Even if they file a joint tax return, spouses can each give $18,000 in 2024 to the same recipient. This effectively doubles the allowable tax-free gift to an individual from a married couple.This strategy, known as gift splitting, enables wealthy couples to give substantial annual gifts to children, grandchildren, and others. This gift can be in addition to tuition paid directly to a grandchild’s school or college, exempted outright from the gift tax.
- Gift in Trust: The gift tax exclusion usually doesn’t apply to money distributed by gift-in-trust conveyances. Donors can give gifts over the annual exclusion without paying taxes by establishing a special trust to receive and distribute the funds. The Crummey trust allows the beneficiary to withdraw assets within a limited period, such as 90 days or six months. This gives the beneficiary a present interest in the trust, and this sort of distribution can qualify as a nontaxable gift. The recipient can only take out a sum equal to the gift given to the trust.
Individuals can gift more than the annual exclusion without reducing their lifetime gift tax exemption under certain 529 college savings plan contributions. Individuals report this gift as being spread over five years on their tax return and file the form annually. However, they cannot make additional gifts to the same recipient during this period.
Examples
- Taxpayer A gave $100,000 in gifts split between five individuals in 2023, or $20,000 each. Because the annual exclusion limit for that year is $17,000 per person, $3,000 of each individual’s gift, or $15,000 of the total amount given, is not excluded and reduces the lifetime exemption by that amount.
- In 2023, a grandmother paid $20,000 for her grandchild’s tuition. That same year, she also gave the student $17,000 for books, supplies, and equipment. Neither payment is reportable for gift tax purposes — the tuition is excluded outright, and the $17,000 is the maximum allowed under the annual exclusion.
How Much Is the Gift Tax?
The gift tax is applied on a sliding scale, depending on the size of the gift. It only kicks in on gifts above and beyond a certain threshold established by the IRS. First, a flat amount is assessed; additional tax is then levied at a rate that ranges from 18% to 40%.
Does the Receiver of a Gift Pay Tax?
The person receiving a gift usually is not required to pay gift tax.
What Is the Lifetime Limit for Gifting?
Individuals can gift $13.61 million as of 2024 over their lifetime.
The Bottom Line
The gift tax is a federal levy that applies when individuals give gifts to another individual. However, the gift tax has been devised so that very few people pay it. Numerous types of gifts are exempted, including those given to a spouse.
