Gift tax is a commonly misunderstood tax. Many people feel that if they receive money as a gift, they will need to pay the IRS part of that gift in the form of gift tax. This is actually not usually the case. Not only does the gift receiver not have to pay gift tax, more often than not, the gift giver also does not have to pay tax. In this blog, we will explain gift tax, who has to pay it and when they have to pay it.
Table of Contents
What is a gift tax and who is taxed?
Gift tax is exactly what it sounds like, it is a tax placed on a gift given to somebody. If someone owes gift tax, it is usually the gift giver. Unless there was an expectation set in place prior to the gift being given, the donor of the gift is responsible for the gift tax if any is due.
How does the gift tax work?
For 2024, the gift tax exclusion is $18,000 per gift recipient. What this does not mean is that any dollar above that $18,000 gift is taxable. What does mean, is that any dollar over $18,000 gifted to an individual by an individual must be disclosed on a gift tax form.
This gift tax form is simply a method of tracking for the IRS. The reason that this is tracked is that there is a lifetime gift exclusion per person, and once that person has given over this exclusion, they must then pay gift taxes on any gifts given above the annual exclusion. The good news here is that this lifetime exclusion is over $13.61 million in 2024. This exclusion drops back to pre-2018 levels in 2026; however, the limit is still over $6 million dollars.
The vast majority of people will never give over $13.61 million in their lifetime (or even $5 million once the higher exclusion sunsets in 2026). So if you are wondering if a gift from your parents, grandparents, aunts, uncles or friends might be taxable, it likely won’t be unless they have been gifted over the lifetime exclusion.
Even if they have given over the lifetime exclusion, the gift tax is their responsibility as the donor, not yours as the gift receiver.
Gift tax limit 2024
The gift tax exemption for 2024 is $18,000 per gift recipient. This is an increase of $1,000 from 2023.
How much can you gift a family member tax-free?
You cangift each individual $18,000 in 2024 without filing a gift tax return. If you gift more than that amount, you have to file a gift tax return. However, you will not have to pay gift tax until you have gifted an aggregate amount over the lifetime exclusion.
If you are gifting for medical expenses or education expenses, as long as you pay directly to the entity, i.e. the university or hospital, those funds do not count against your annual or lifetime tax gift tax exclusion.
Can each parent gift $18,000 to a child in 2024?
Yes! In 2024, each parent can gift up to $18,000 to a child without triggering the gift tax.
What was the gift tax limit in 2023?
In 2023, the gift tax limit was $17,000 per individual. For married couples, each spouse could gift up to $17,000, resulting in a combined limit of $34,000.
If you gifted more than this amount, you must file a federal gift tax return, Form 709, in 2024.
Gift Tax 2023 and 2024
| 2024 | 2023 | |
| Gift Tax Exemption | $18,000 per gift recipient | $17,000 per gift recipient |
| Gift Tax Lifetime Exclusion | $13.61 million | $12.92 million |
Gift tax rate for 2024
If you are lucky enough, and generous enough to use up your lifetime exclusion, gift taxes range from 18 to 40%.
Do you pay taxes when you receive a gift?
As discussed above, the gift receiver is not responsible for gift tax when they receive a gift. The gift receiver also does not need to fill out a gift tax return. The donor of the gift is responsible for ensuring that this gift is reported to the IRS on their own tax return.
How does the IRS know if I give a gift?
The IRS finds out if you gave a gift when you file a form 709 as is required if you gift over the annual exclusion. If you fail to file this form, the IRS can find out via an audit. If they do not find out during your lifetime, they could find out during an audit of your estate, and then hit your estate with penalties and interest that accrued from when the gift tax return should have been filed.
The IRS can also use public records, such as title transfers, to track gifts that were not reported. Some states will aggressively track gifts and report to the IRS as well.
How do I avoid gift tax?
Utilize the annual exclusion: Take advantage of the annual gift tax exclusion, which allows you to gift up to a certain amount to each recipient without incurring gift tax. For 2024, this is $18,000. By staying within this limit, you can avoid gift tax consequences.
Leverage the lifetime exemption: Each individual has a lifetime gift tax exemption, which is quite substantial. As of 2024, this amount is $13.61 million. Once you exceed the lifetime exemption, gift tax becomes applicable.
Gift splitting: If you’re married, you and your spouse can each make separate gifts to the same individual, effectively doubling the annual exclusion amount for that recipient. This is known as gift splitting.
Pay for education or medical expenses: Payments made directly to educational or medical institutions for someone else’s tuition or medical expenses are not considered gifts for tax purposes and therefore do not count against the annual or lifetime exclusion limits.
Establish a trust: Consider setting up certain types of trusts, such as irrevocable trusts, to transfer assets to beneficiaries. Trusts can have tax advantages and allow you to control how and when assets are distributed.
Seek professional advice: Tax laws and regulations are complex and can change over time. Consulting with a fee-only financial advisor can help you navigate the intricacies of gift tax laws and develop a plan tailored to your specific financial situation and goals.
It’s important to note that while these strategies can help minimize gift tax liabilities, they require careful planning and consideration of individual circ*mstances. Additionally, tax laws vary by jurisdiction, so it’s essential to stay informed about the regulations in your specific location.
How much can you inherit from your parents without paying taxes?
In general, the receiver of an inheritance does not have to pay gift tax or inheritance tax. If the parents are alive when they gift the money, it is their responsibility to file a gift tax and pay any tax due. If they are deceased when the estate pays the inheritance to the heirs, it is the estate’s responsibility to pay the tax due.
Filing a gift tax return
Who is responsible for filing a gift tax return?
The gift giver is responsible for filing a gift tax return if they gift more than the annual exclusion.
What happens if I don’t file a gift tax return?
If you fail tofilea gift tax return, you’ll be assessed a gift tax penalty of 5 percent per month of the tax due, up to a limit of 25 percent. If your filing is more than 60 days late (including an extension), you’ll face a minimum additional tax of at least $205 or 100 percent of the tax due, whichever is less.
Failure topaythe gift tax on time will result in a penalty of 0.5 percent per month of the amount due, up to a total of 25 percent. If you ignore an IRS notice to pay gift tax, your monthly penalty will increase from 0.5 percent to 1 percent. Filing an extension does not allow you to pay gift tax late; you must still pay the tax by the tax deadline, even if you have not filed yet.
Are gifts eligible for tax deductions?
Contributions of cash or property to family or friends don’t qualify for tax deductions. Only donations made to eligible nonprofit organizations may be consider tax-deductible.
What is the gift tax on $50,000?
Unless you have gifted over $13.51 million in your lifetime, there is no gift tax on $50,000. The $50,000 needs to be disclosed to the IRS for every dollar over the $18,000 annual exclusion, and will simply count against your $13.61 million lifetime exclusion.
Gift Tax Lifetime Exclusion
What is the gift tax lifetime exclusion for 2024?
The lifetime exclusion is $13.61 million in 2024.
How does the gift tax lifetime exclusion work?
Each time you give a gift that is over the annual gift exclusion amount ($18,000 per gift receiver for 2024), you must file a gift tax return with your normal tax return. This gift tax return adds up over time, and once you hit the lifetime maximum exclusion amount ($13.61 million in 2024 – this amount typically increases with inflation), you will then be hit with gift tax when you give over the annual exclusion amount.
For example, a woman decides to give her grandson $25,000 as his college graduation present. This amount would exceed the 2024 gift tax limit but she wouldn’t owe any additonal taxes. She would report the gift to the IRS using a Form 708 and deduct $7,000 from her $13,61 million lifetime exemption.
It’s important to remember that an individual’s lifetime exemption limit pertains to both gifts given during their lifetime and the property passed on after they have died. Therefore, the$13.61 million exclusion also is your estate tax exclusion. So if you give $13.61 million over your lifetime, and you leave an estate behind, that estate will likely be taxed at the estate tax rate.
Reminder, this $12.92 million drops back to pre-2018 levels in 2026, which was around $5 million.
How to calculate the IRS Gift Tax
Similar to federal income tax, gift tax rates are progressive, with the highest rate reaching 40%. The larger the gift, the higher the potential tax liability. It’s important to note that gift taxes are only applicable once an individual exceeds their lifetime exemption.
Once this lifetime threshold is surpassed, taxes become due on gifts exceeding the annual exclusion limit of $18,000 in 2024.
To compute their tax responsibility, the donor would refer to the following tax brackets:
Federal gift tax rates
| Taxable Amount Exceeding Annual 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% |
| $1,000,000+ | 40% |
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Lifetime gift tax limit change in 2026
The lifetime gift tax exclusion will be cut in half in 2026. The estimates put the 2026 lifetime limit at around $6.8 million. However, the IRS will allow the use of either the lifetime gift tax exclusion that is applied when gifts are made or the exclusion amount applicable when the donor dies. It will be whichever is greater. Therefore if you made large gifts before 2026 then you don’t need to worry.
How to give the gift of money
Think about the timing: If you plan to give a significant gift of money, it’s essential to consider the timing to maximize tax efficiency. Spreading out large gifts over multiple years can help minimize gift tax implications and make use of the annual exclusion.
Consult a tax professional: Before making substantial gifts, especially those that exceed the annual exclusion, it’s wise to consult with a tax professional or financial advisor. They can provide personalized guidance based on your financial situation and help you navigate any potential tax issues.
Explore other gifting strategies: There are other gifting strategies that you can explore to minimize taxes and maximize the impact of your gift. These may include setting up trusts, contributing to a529 college savings plan, or making charitable donations.
Document the gift: When giving a gift of money, it’s essential to document the transaction to avoid any confusion or disputes down the line. Keep records of the amount gifted, the recipient, and the date of the gift, especially for gifts that exceed the annual exclusion.
Is it better to gift or inherit money?
Whether you should gift orinherit moneydepends on your financial goals and personal situation.
Gifting money can be a great way to help family members or friends, and it can be a way to reduce your taxable estate. If you are gifting money, you can take advantage of the annual gift tax exclusion without triggering the gift tax.
Inheriting money can also have its benefits. When youinherit assets, you typically receive a stepped-up basis, which means that the value of the assets is adjusted to their current market value at the time of inheritance. This can be beneficial if the assets have appreciated significantly since they were purchased, as you won’t owe as much in capital gains taxes if you decide to sell them.
Be informed about gift taxes in 2024
The majority of people probably aren’t affected by the gift tax and don’t need to disclose smaller gifts to the IRS. However, it’s important to know what the limits are and how it works so that you are aware in case you do give a large amount of money in the future.
If you want help with your finances and are interested in having a comprehensive financial plan, feel free toschedule a discovery callwith one of our financial advisors today!
Alvin Carlos
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.
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District Capital is an independent, fee-only financial planning firm. We help professionals and entrepreneurs in their 30s and 40s elevate their finances and maximize their money. We are based in Washington, D.C and we work with people virtually nationwide.
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