Gift Tax

A person who transmits anything of value to another without obtaining something of comparable worth in exchange is subject to the gift tax, which is a type of federal tax. Gifts can include anything of high value, including substantial sums of cash or real estate, and the tax can be applied even if the donor had no intention of giving the item as a gift.

You are only permitted to give a certain amount of gifts before you must submit a tax return and are subject to taxation, according to IRS regulations. A lifetime gift tax exemption is based on amounts that are reported and exceed the annual thresholds. The gift tax becomes due when this generous exemption is out.

Special Considerations

Gift tax calculation formulas are included in Form 709. However, submitting Form 709 does not obligate you to pay the gift tax.

You won't be subject to gift tax if you provide a gift that is greater than the annual exclusion cap ($16,000 in 2022 and $17,000 in 2023) but less than the lifetime cap ($12.06 million in 2022 and $12.92 million in 2023), but you still need to declare the gift.

The gift tax has a multitude of exemptions as well. Generally speaking, the following things are exempt from gift tax:

  • Presents for the donor's wife. If the spouse is a citizen of the United States, gifts are tax-free indefinitely. If the spouse is not a citizen of the United States, the yearly adjusted value of tax-free gifts is $164,000 in 2022 and $175,000 in 2023.
  • Gifts given to a political group for use
  • Payments made by a donor to a person or an institution, like a college, a doctor, or a hospital, for medical and educational expenditures.
  • Contributions to a charity
  • Gifts with a value lower than the applicable year's annual gift tax exclusion rate

How Gift Tax Works?

The federal gift tax was established to stop people from giving valuables to others in order to avoid paying income taxes. To avoid unfair hardship and to force donors and recipients to pay their taxes, the gift tax is implemented. By April 15 of the year following the gift, donors are required to complete Form 709, Federal Gift Tax Return, and submit it with their yearly tax returns.

The size of the taxable gift determines the gift tax rate, which can range from 18% to 40%.

Only annual gifts over a particular threshold are subject to the tax; gifts below that threshold are exempt. For 2022 and 2023, the yearly exclusion is $16,000 and $17,000, respectively.

Since those are per recipient restrictions, you might give multiple gifts totaling up to $16,000/$17,000 to various recipients without incurring a gift tax.

Key Takeaways

  • Those who give money or property to another person are subject to the gift tax, which is a federal tax.
  • Depending on the value of the present, the gift tax might range from 18% to 40%.
  • A lifelong tax exemption on gifts is permitted by the IRS, and it is updated yearly to account for inflation.
  • Presents priced at less than the yearly exclusion amount, gifts made to spouses of citizens of the United States, gifts made to political parties for use by the organization, gifts made for medical and educational expenditures are all excluded.
  • Two methods for avoiding the gift tax are gift splitting and giving gifts in trust.
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