While it is better to give than to receive, if you give a gift above a certain amount, you might end up owing money to the Internal Revenue Service (IRS). The federal tax code has very specific rules about how much you are allowed to transfer to others each year—and over the course of your lifetime—in the form of a gift. Any gifts above that amount may be subject to gift tax, which is paid by the giver.
However, not every gift is subject to gift tax. There are annual exclusion amounts, a lifetime exemption amount, and other exclusions, such as education or medical exclusions, that relieve a giver of paying federal gift taxes. Because the lifetime exemption amount is very generous at this time, many people will not actually owe taxes on their gifts. However, high net worth individuals should be mindful of how gifting can affect the estate tax that may be due upon their death.
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 a contractual term that means “exchange value.” Full consideration is generally considered fair market value.
Any exchange can be considered a gift and subject to gift tax, with the following limited exceptions:
● Tuition or medical expenses paid on behalf of another person (education exclusion and medical exclusion);
● Gifts to a political organization;
● Gifts to your spouse (unlimited gifts can be exchanged between spouses without gift tax implications, assuming both spouses are US citizens);
● Gifts to qualified charities; and
● Gifts that do not exceed the annual exclusion amount ($16,000 in 2022) to any one recipient in any given year.
The $16,000 annual gift tax exclusion is calculated per recipient. In other words, 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).
In addition to the annual gift tax exclusion, there is also a lifetime exemption. The lifetime exemption is the amount you can gift across all tax years before you owe gift taxes. 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. For 2022, the lifetime exemption is $12.06 million.
Generosity is its own reward. But 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. For guidance regarding gift taxes, estate taxes, and estate planning, contact our office to schedule an appointment.