When is a gift not a gift? The answer will change in light of IRS considerations. In the eyes of the IRS, some gifts trigger what might seem like a penalty – taxes; and some gifts are defined as not a gift at all.
The federal tax code has very specific rules about how much you can transfer in the form of a gift, both annually and over the course of your lifetime, without triggering any taxes. Any gifts above those amounts may be subject to gift tax, which is paid by the giver. In addition to the annual exclusion amount and the lifetime exemption amount, the tax code also provides that some gifts avoid a gift tax because of the type of gift, defining some transfers as not gifts at all. The lifetime exemption amount is very generous at this time, and many people will not actually owe taxes on their gifts. However, individuals of higher net worth should be aware of how gifting can affect the estate tax that may be due upon their death.
What is Considered a Gift under Gift Tax Law?
According to the IRS, a gift is a transfer of money, property, or other assets, such as real estate or stock, for which the giver does not receive “full consideration.” Consideration is the value exchanged. Full consideration, as the IRS defines it, is fair market value. The fair market value of property is the price that a buyer and seller, both having reasonable knowledge about the property and under no pressure to trade, would agree to on the open market. So a gift occurs when the person making the transfer does not receive an exchange equal to the fair market value of what was transferred.
What is Not Considered a Gift under Gift Tax Law?
The Internal Revenue Code says that certain exchanges are not gifts. Some examples are:
- Tuition or medical expenses paid on behalf of another person
- Contributions to a political organization
- Transfers to your spouse (assuming both spouses are US citizens)
- Contributions to qualified charities
- Gifts that do not exceed the annual exclusion amount ($16,000 in 2022) to any one recipient in any given year
What Else Should I Know about the Gift Tax?
When giving a gift to another person, here are some other tax-related points to keep in mind:
- The giver customarily pays the gift tax. The gift taxed is assessed on the giver (donor) and not the recipient (donee). But the donee can agree to pay the gift tax instead of the donor. In such a case, the IRS advises that the payment should be discussed with a tax professional. In cases where the donor owes tax on the gift and does not pay it, the IRS could seize the gift or otherwise turn to the donee for tax payment, although this usually happens only if the donor is deceased.
- The annual gift tax exclusion is per recipient. The $16,000 annual gift tax exclusion is calculated per recipient. You can gift up to $16,000 per person to an unlimited number of individuals in any given taxable year without triggering the gift tax. For gifts given by a married couple, the annual exclusion amount is $32,000 (twice the individual exclusion).
- There is a federal gift tax form. Gifts that exceed the annual exclusion amount could be subject to tax, depending on whether you have used up your lifetime exemption (see below). In any case, if your gift exceeds the annual exclusion amount or applies the annual exclusion to a transfer in trust, you must file Form 709 even if no gift tax is due.
For answers to common questions about gift tax issues, see this IRS resource.
How Does the Lifetime Exemption Work for Gift Taxes?
In addition to the annual gift tax exclusion, there is also a basic exclusion amount known as the lifetime exemption. The lifetime exemption is the amount you can gift across all tax years before you owe gift taxes. For 2022, the lifetime exemption is $12.06 million.
Importantly, the lifetime gift tax exemption is tied to the estate tax exemption. The gift tax exemption and the estate tax exemption are effectively treated as a single amount ($12.06 million in 2022, but subject to change in future years). So over the course of a taxpayer’s life, the amount of nonexcluded gifts that they give counts against their lifetime exemption and could also affect the estate tax that may be owed.
For example, consider if a taxpayer has gifted $2 million more than their total annual exclusions and passes away in 2022, the excess gifts count against their lifetime exemption, reducing the balance to $10.06 million. If their estate’s value exceeds $10.06 million, estate taxes would be due on the excess amount.
Most individuals will probably not exceed the lifetime gift tax exemption. If they do, the tax is graduated and increases in proportion to the taxable amount. Overall, the gift tax rate ranges from 18 percent for taxable amounts up to $10,000, to 40 percent for taxable amounts over $1 million.
Give Yourself the Gift of an Estate Planning Professional
You owe it to yourself to make sure that your gifts are properly accounted for, the right gift tax forms are filed, and that gifting fits into your estate planning goals. A qualified estate planning attorney can help you understand the tax implications of gifting, including the long-term estate tax implications, as well as some of the hidden costs of a gift, such as real estate taxes, transfer fees, or capital gains tax.
For guidance regarding gift taxes, estate taxes, and estate planning, contact our office to schedule an appointment.