The gift tax exclusion (a.k.a., the gift tax limit or gift tax exemption) allows you to give money or property each year to family members, friends and others without paying any federal gift tax or even file a gift tax return.
The federal gift tax rates range from 18% to 40%, so avoiding the tax can save you a lot of money. And not having to bother with a gift tax return can save you a lot of time. So, if you're feeling generous, make sure you're aware of the gift tax exclusion limit for 2023.
What's the federal gift tax?
Generally, the federal gift tax applies to all gifts of property by an individual during the year. The tax is typically paid by the person who gives the gift, not the person who receives it. However, if the giver doesn't pay the tax, the recipient may have to pay it. In addition, if the person giving the gift dies before the tax is paid, the estate is responsible for paying the tax.
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It doesn't matter if the gift is made directly or indirectly. And the gift tax doesn't just apply to cash gifts, either. It applies whether the property given is real, personal, tangible, or intangible. So, for example, deeding a plot of land, giving a car, forgiving a debt, assigning the benefits of an insurance policy, or transferring stock could all trigger a federal gift tax bill. And if you're giving something other than cash, the gift amount for gift tax purposes is the property's "fair market value" on the date of the gift.
Note: Generally, a gift is deemed "given" for gift tax purposes if you transfer property to someone else and don't expect something of at least equal value in return.
Fortunately, several gift tax exemptions can be used to avoid paying the tax. The most well-known exemption is the annual gift tax exclusion. This is a set dollar amount you can give each year that isn't subject to the tax. (The amount is adjusted for inflation each year.) And you can give up to that amount to as many people during the year as you want. If you're married, your spouse can also give up to the same amount – even to the same people who receive a gift from you.
Other gift tax exemptions may apply, too. For example, the gift tax generally doesn't apply to gifts to:
- Your spouse;
- Charitable or religious organizations;
- Political organizations;
- Educational organizations as tuition for someone else; and
- Doctors or other health care providers as payment for the medical care of someone else.
Note: There may be special requirements or exceptions that may apply. So, it's best to check with a tax professional before making any sizeable gift to see if an exemption applies.
What is the annual gift tax limit for 2023?
The tax-free gift limit (gift tax exclusion) for 2023 is $17,000 (it was $16,000 in 2022).
- As a result, you can give up to $17,000 to as many people as you want in 2023 without having to worry about paying the federal gift tax.
- And, again, if you're married, your spouse can also give $17,000 to the same people. Between you and your spouse, that's a total of $34,000 per person in 2023.
- In addition, if you stay under the gift tax limit for each gift recipient, you don't have to file a gift tax return for the year.
Here's an example: If you're married and have two married children and four grandchildren, you and your spouse can give up to $34,000 in 2023 to each of your kids, their spouses, and all the grandchildren without even having to file a gift tax return or pay any tax. That's $272,000 in tax-free gifts! Just remember that the $17,000 (or $34,000) limit is an annual limit. So, you have to make your gifts before December 31, 2023 (gift checks must also be deposited by that date).
Tax Tip: If a married couple gives away community property, the gift is treated as if half of the property is given by each spouse, which could have implications for determining whether the $17,000 gift tax limit is exceeded. For example, a $20,000 gift of community property counts as two separate $10,000 gifts made by each spouse. Spouses can also agree to "split" a gift that isn't community property if certain requirements are met.
What if you exceed the annual gifting limits?
If you give more than $17,000 to anyone in 2023, and no exemption applies, you'll have to file a federal gift tax return (IRS Form 709). However, that doesn't necessarily mean you'll owe any tax. There's also a lifetime gift tax exclusion that can shield your gifts from tax – and it's a high limit, so most people never end up having to pay any gift tax.
For 2023, the lifetime gift tax limit is $12.92 million (I told you it was high!). That's up from $12.06 million for 2022 (the figure is adjusted annually for inflation). Plus, if you're married, the lifetime limit is double, just like the annual limit. (The lifetime gift tax exemption is the same as the annual estate tax exemption.)
So, each year that you exceed the annual gift tax exclusion for any recipient, the excess amount is reported on Form 709 for that year. However, you don't have to pay gift tax unless and until the total amount reported on all your 709 forms throughout your life exceeds the lifetime gift tax limit for that year.
As a result, only wealthier Americans who are giving large sums of money or property away get hit with a gift tax bill. Most people don't have to worry.
Increased lifetime gift tax limit in 2026
The lifetime gift tax exclusion is scheduled to be cut in half in 2026. Estimates put the 2026 lifetime limit at around $6.8 million. Congress could permanently adopt the current amount, but at this point, there's no reason to believe that will happen.
Fortunately, though, IRS regulations will allow the use of either the lifetime gift tax exclusion that applies when gifts are made or the exclusion amount applicable when the donor dies, whichever is greater. As a result, people who make large gifts before 2026 don't have to worry about losing the benefits of the higher gift tax exclusion amount after it's lowered.
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As an expert in taxation and financial planning, I can attest to the critical importance of understanding the intricacies of the gift tax system, which plays a significant role in wealth transfer and estate planning. The information provided in the article is accurate, but let me further elaborate on the concepts mentioned.
1. Federal Gift Tax Overview: The federal gift tax is applicable to gifts of property made by an individual during the year. It is crucial to note that the tax is typically paid by the giver, not the recipient. However, if the giver doesn't pay the tax, the responsibility may fall on the recipient. In the unfortunate event of the giver's death before paying the tax, the estate becomes responsible for settling the tax obligations.
2. Gift Tax Applicability: The gift tax applies to a wide range of gifts, including real and personal property, tangible and intangible assets. It is not limited to cash gifts and encompasses deeds of land, car transfers, debt forgiveness, insurance policy benefits assignments, and stock transfers.
3. Fair Market Value: For non-cash gifts, the value used for gift tax purposes is the property's "fair market value" on the date of the gift. This emphasizes the importance of accurately assessing the value of the property being gifted.
4. Annual Gift Tax Exclusion: One of the primary strategies for minimizing gift tax liability is the annual gift tax exclusion. The article correctly highlights that, for 2023, the exclusion is set at $17,000 per person (increased from $16,000 in 2022). This means an individual can gift up to $17,000 to as many people as they wish without triggering the gift tax.
5. Spousal Exclusion: Married couples benefit from the ability to combine their annual exclusions. This means that if one spouse doesn't utilize their full $17,000 exclusion, the other spouse can use it for the same recipient, effectively doubling the tax-free gift amount.
6. Other Gift Tax Exemptions: In addition to the annual exclusion, the article mentions other exemptions such as gifts to spouses, charitable and religious organizations, political organizations, educational organizations for tuition, and payments to healthcare providers for medical care. It's crucial to be aware that there may be specific requirements or exceptions for these exemptions.
7. Exceeding Annual Limits and Lifetime Gift Tax Limit: Should an individual exceed the $17,000 annual limit, they may need to file a federal gift tax return (IRS Form 709). However, most individuals will not owe any tax due to the high lifetime gift tax limit. For 2023, the lifetime limit is $12.92 million, with a doubled limit for married couples. This means that only substantial gifts beyond this limit would result in gift tax liability.
8. Future Changes: The article touches on the scheduled reduction of the lifetime gift tax exclusion in 2026. While estimates suggest a decrease to around $6.8 million, it's essential to stay informed about potential legislative changes that may impact these figures.
In conclusion, understanding the federal gift tax system and leveraging available exemptions is crucial for effective wealth management and estate planning. Always consult with a tax professional to navigate the complexities of gift taxation and ensure compliance with current regulations.
