‘Tis The Season To Give, But What About Gift Taxes?

It’s the time of year for giving…but do I have to pay a gift tax on monies I gift to family or friends?

The short answer is “it depends.”

The gift tax exclusion is increasing in 2023 to $17,000 (the current exclusion is $16,000 in 2022). This means you can give away $17,000 per year, per person without reporting to the IRS. This is great news!

So What Has a Gift Tax?

The gift tax is a tax the IRS imposes on property or money transferred without consideration. This means you gave away property or money without receiving anything in return. If you gift an asset or give away money above this IRS threshold, then something known as a gift-tax return will need to be filed. However, filing a gift tax return does not mean you will owe taxes on the gifted funds.

But What is the Gift Tax Exclusion?

Filling a gift tax return means the amount over the new exclusion limit of $17,000 is deducted from something known as your lifetime exclusion. Currently the lifetime exclusion is $12.06 million in 2022 and increasing to $12.92 million in 2023. Thus, the amount gifted would be deducted from your lifetime exclusion.

What are Some Examples? 

Sue decided she wanted to gift her granddaughter, Amelia, $40,000 for her wedding and honeymoon expenses. She made this gift on November 1, 2022. In 2022, the current exclusion is $16,000. Sue would file a gift tax return with her CPA for $24,000. Thus, $24,000 would be deducted from Sue’s lifetime exclusion of 12.06 million.

It is worth noting that if Sue gifted the $40,000 funds to Amelia and Amelia’s fiancé in 2022, then $16,000 could be gifted to each of them under the current exclusion. Thus, a gift tax return would only have to be filed for $8,000 for Sue’s lifetime exclusion of 12.06 million.

Remember, if you stay below the annual gift exclusion and your lifetime exclusion, you or your estate will not have to worry about taxes.

What about the person receiving the gift, do they have to pay a gift tax?

Generally, no, the person receiving the gift does not have to pay a gift tax. However, if the asset or monies received as a gift later produce income (earn interest or pay a dividend) then the income produced off this asset is most likely taxable to the gift recipient.

It is always wise to consult with your CPA or attorney before gifting large amounts of assets to determine what kind of reporting may be required. But during this season of giving, know that there is a good amount of leniency up to these thresholds.