Gift Tax

Gift Tax

The Gift Tax is a federal tax applied to an individual giving anything of value to another person without receiving something of equal value in return. The giver is generally responsible for paying the tax. The tax is applicable when the total value of gifts given by an individual exceeds a specific annual exclusion limit set by the Internal Revenue Service (IRS).

Annual Exclusion

As of 2023, the annual exclusion amount is $17,000 per recipient. This means an individual can gift up to this amount to as many people as they want without incurring any gift tax.

Lifetime Exemption

In addition to the annual exclusion, there is a lifetime gift Tax Exemption, which is part of the overall estate Tax Exemption. As of 2023, the lifetime exemption amount is $12.92 million.

Examples

If an individual gifts $15,000 to a friend, no gift tax is owed as it is below the annual exclusion limit. However, if they gift $20,000 to the same friend, the excess $3,000 may be subject to gift tax. This excess amount would reduce the lifetime exemption by $3,000.

Cases

Consider a scenario where a parent gives $25,000 to their child. The first $17,000 would fall under the annual exclusion, but the remaining $8,000 would need to be reported and would reduce the parent’s lifetime exemption by that amount.