What Is The Gift Tax Limit?
Giving someone a gift is nice. Getting penalized for it by the IRS, not so much.
You might not be aware that every year, the Internal Revenue Service (IRS) sets a limit on the amount you can gift someone without having to report it. It’s not always just about an outright gift of cash or something of value: The IRS rules also take into account making an interest-free or reduced-interest loan, or selling something at less than its full value.
Read on to find out more about whether the gift you give will take a bite out of your finances.
The Gift Tax Explained
Simply put, the gift tax is a federal tax on any property or money you transfer to another individual without receiving something of equal value in return. According to the IRS, anything sold or given not at “fair market value” may fall into the “gift” category.
What does “fair market value” mean? That’s a fair question. The IRS defines this value as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” So if you sell a rare painting by one of the old masters for a dollar and change, rest assured that the sale price won’t be considered fair market value and you’ll be tagged with giving a gift – and expected to pay a gift tax. The tax rate can range from 18% to 40%, depending on the gift size.
But the IRS isn’t some type of Grinch trying to get you to cut back on gift giving to friends, family, and loved ones. In fact, the IRS generally doesn’t care about or tax gifts, except in the following instances.
What Happens When The Gift Is Worth More Than The Annual Exclusion?
First things first: It’s important to note that your annual exclusion limit counts each recipient, not the total sum of your gift giving. For 2022, the annual gift exclusion is $16,000, as compared to $15,000 for each of the previous four years. All of which means you can give up to $16,000 to as many people as you’d like this year, all tax-free. What’s more, if you’re married, you and your spouse can each gift the maximum amount to the same individual, meaning some lucky someone can rake in gifts totaling up to $32,000 for the calendar year.
Before you start doling out gifts without looking at the bottom line, however, you might want to take into account the lifetime exclusion limit stipulated by the IRS. If you give someone a gift of $20,000 this year, you’ll need to file a gift tax return and also count the gift against your lifetime tax exclusion. But if your generosity never adds up to your lifetime tax exclusion, you won’t pay tax on the gift. As the current lifetime exclusion is $12.06 million, up from $11.7 million in 2021, it seems like there’s plenty of room to indulge your generous spirit.
There are a few categories that your gifts can fall into, which include: gifts to nonprofits (considered charitable donations), gifts to your spouse or other dependents such as kids living at home, gifts to political organizations, gifts that don’t exceed the annual exclusion for the calendar year, and tuition or medical expenses you pay for someone.
Reporting A Gift
Citizens or residents of the United States need to file an IRS Form 709 if a gift exceeds the annual exemption. Filing can be completed either online through the Electronic Federal Tax Payment System or by printing and mailing the stipulated forms. In addition to the 709 form, the IRS also asks for copies of relevant documents regarding the transfer, documentation of any unusual item such as partially gifted assets or other items relevant to the transfer, and proof of any appraisals.