Way more people worry about the gift tax than they need to. If this is your first time thinking about the gift tax, this post will probably explain why you don’t need to pay it. If you know you need to pay it, here are the current limits.
What is the Gift Tax?
The gift tax is a tax on the transfer of property from one person to another. It only applies when the person giving the gift gets nothing in return or gets less than what the gift is worth.
The gift tax only applies to gifts over a certain amount. There are both annual and lifetime limits below which the gift tax doesn’t apply.
You should also note that the gift tax applies to interest-free or reduced-interest loans. The idea is that you’re giving the person a gift by lending them money for less than what a loan would usually cost.
How much money can you gift tax-free?
There are two numbers you need to know if you don’t want to pay taxes on gifts.
You generally don’t have to pay any taxes until your gifts exceed your lifetime gift limit.
If you stay under the annual gift tax exclusion, you generally don’t need to report your gifts to the IRS at all.
What is the annual gift tax exclusion?
You can give up to $16,000 per person per year and be exempt from the gift tax. The annual exclusion is per person, so you can give up to $16,000 each to as many people as you want.
If you’re married, both you and your spouse each get a $16,000 limit. So you can give $32,000 as a couple to your child or anyone else, and gift taxes won’t apply.
What is the lifetime gift tax limit?
There’s also an IRS lifetime gift tax limit. There is no gift tax on up to $12.06 million in gifts over your lifetime.
This limit also applies to excess annual gifts. So if you gave someone $20,000 in a year, that $4,000 above the annual limit won’t be subject to gift tax as long as you’re still under the $12.06 million lifetime limit.
The lifetime limit is total, not per person. It’s $12.06 million to everyone, not $12.06 million to each person.
Spouses each get their own $12.06 million limit. If you give gifts as a couple, that adds up to give you $24.12 million to work with.
Will the lifetime gift tax limit drop in 2026?
The current gift tax limits are roughly double what they were previously.
The limit increase was part of the Tax Cuts and Jobs Act of 2018 that expires in 2026 unless Congress takes action.
If the current gift tax limits are allowed to expire, the lifetime gift tax limit could drop to as low as $5 million.
What is the gift tax rate?
The gift tax rate ranges from 18% to 40% depending on the amount of your gifts, when you gave them, and other factors.
Gift taxes are paid by the giver rather than the receiver. You can calculate gift taxes using IRS Form 709.
What is considered a gift?
Gifts can include money, real estate, and tangible property.
The IRS gift definition is when you give something without expecting to receive something of equal value in return. This can include selling or trading something at less than its full value.
You may also be giving a gift if you loan money interest-free or at reduced interest.
What can be excluded from gifts?
Some types of gifts don’t count towards the gift tax limits and are not subject to the gift tax. They include:
- Paying for school tuition if paid directly to the educational institution
- Paying for medical bills if paid directly to the provider
- Gifts to a spouse who is a U.S. citizen (unlimited)
- Up to $164,000 per year in gifts to a spouse who is not a U.S. citizen
When do you need to file a gift tax return?
You need to file a gift tax return if any one of the following applies. This does not necessarily mean you will have to pay gift tax if either the annual or lifetime limits cover your gift.
- Gifts above the annual limit (even if still under the lifetime limit)
- Gifts of a future interest regardless of value or amount
- Any gifts to a spouse (each spouse must file separate gift tax returns — there are no joint gift tax returns)
- Any gifts to another person that you split with your spouse
- If you give a gift from community property, each spouse must file a gift tax return for one-half of the gift’s value. It isn’t possible to assign a different share to each spouse — it must be 50/50.
- The above provision also applies to gifts held as joint tenants or tenancies by the entirety.
- If a trust, estate, partnership, or corporation makes a gift, the individual beneficiaries, partners, or stockholders are considered donors and may be liable for the gift and GST taxes.
- The donor is responsible for paying the gift tax. However, if the donor does not pay the tax, the person receiving the gift may have to pay the tax.
When are gift tax returns due?
Most gift tax returns follow the same filing date as personal income tax returns. Gift tax returns are usually due on April 15th, and you may be able to request a six-month extension to file.
If you owe gift tax, the payment deadline is April 15th, and extensions don’t extend your time to pay.
Is a gift of money taxable?
As discussed above, the giver of a gift may have to pay a gift tax for very large gifts.
The receiver of a gift generally doesn’t have to pay any taxes on a gift.
