The gift tax is a federal levy on the transfer of money or property to another person when equal value is not received in return. While it may sound cumbersome, most Americans will never pay a cent in gift taxes to Uncle Sam due to several key IRS rules. However, a financial advisorcan help you determine what your tax liability may be if you plan to give money or property to another person.
Do you have questions about building a tax plan? Speak with a financial advisor today.
What Is the Gift Tax?
When a person gives money or property to someone other than their spouse or dependent, they may be required to pay gift tax. This federal excise starts at 18% and can reach up to 40% on certain gift amounts. The responsibility for paying the tax typically lies with the donor, not the individual receiving the gift. While recipients don’t face any immediate tax consequences, they may have to pay capital gains tax if they sell gifted property in the future.
Not all gifts are subject to this tax, though. Certain gifts are entirely free of tax, including:
- School tuition and education payments
- Charitable donations
- Medical expenses
- Political contributions
- Gifts to spouses and dependents
The gift tax does not play a significant role in the finances of most Americans because of two key IRS provisions: the annual gift tax exclusion and lifetime exemption.
Annual Gift Tax Exclusion
The IRS allows individuals to give away a specific amount of assets or property each year tax-free. For 2024, the annual gift tax exclusion is $18,000, meaning a person can give up to $18,000 to as many people as he or she wants without having to pay any taxes on the gifts. For example, a man could give $18,000 to each of his 10 grandchildren this year with no gift tax implications. For context, the 2023 gift tax exemption is $17,000.
But perhaps the same man chooses to give each grandchild $22,000 instead, exceeding the 2024 annual exclusion limit by $4,000 per gift. In this scenario, grandpa could potentially owe gift taxes on the $40,000 overage, but not necessarily.
What about for married couples? Each spouse may give away $18,000 tax-free in 2024. This would allow Cynthia and Joe, a married couple, to give up to $36,000 to each of their three nieces and nephews every year.
Lifetime IRS Gift Tax Exemption
If a gift exceeds the $18,000 limit for 2024, that does not automatically trigger the gift tax. Also for 2024, the IRS allows a person to give away up to $13.61 million in assets or property over the course of their lifetime and/or as part of their estate. If a gift exceeds the annual exclusion limit, the difference is simply subtracted from the person’s lifetime exemption limit and no taxes are owed.
Consider this example for the 2024 tax year: A woman decides to buy her granddaughter a $30,000 car as a college graduation present. Grandma would technically exceed the 2024 $18,000 exclusion limit by a total of $12,000, but she wouldn’t owe additional taxes.That’s because she would report the gift to the IRS using a Form 709 and deduct $12,000 from her $13.61 million lifetime exemption. As a result, she would still be eligible to give away up to $13,598,000 tax-free.
Here’s a breakdown:
IRS Gift Limit Example
| Gift Value | 2024 Gift Tax Exemption Limit | Taxable Amount | 2024 Lifetime Gift Tax Exemption Limit | Remaining Lifetime Exemption Limit After Gift |
| $30,000 | $18,000 | $12,000 | $13,610,000 | $13,598,000 |
It’s important to remember that a person’s lifetime exemption limit applies to gifts that a person gives while still alive and property left to heirs after the person’s death.
How to Calculate the IRS Gift Tax
As you can see, only people with millions of dollars to give away are subject to the federal gift tax. But if you’re one of those fortunate people, calculating your gift tax liability isn’t overly difficult.
Like federal income tax, gift tax rates are marginal, with the top rate reaching 40%. The larger a gift is, the more a person will potentially pay in taxes. But remember, you don’t have to pay gift taxes until someone exceeds their lifetime exemption.
After eclipsing this lifetime limit, taxes will be due on gifts that surpass the annual exclusion limit ($18,000 in 2024 and $17,000 in 2023). To calculate their tax liability, the donor would use the following tax brackets:
Federal Gift Tax Rates
| Taxable Amount Exceeding Annual Exclusion Limit | Gift Tax Rate |
| $0 – $10,000 | 18% |
| $10,001 – $20,000 | 20% |
| $20,001 – $40,000 | 22% |
| $40,001 – $60,000 | 24% |
| $60,001 – $80,000 | 26% |
| $80,001 – $100,000 | 28% |
| $100,001 – $150,000 | 30% |
| $150,001 – $250,000 | 32% |
| $250,001 – $500,000 | 34% |
| $500,001 – $750,000 | 37% |
| $750,001 – $1,000,000 | 39% |
| $1,000,000+ | 40% |
Bottom Line
Understanding the ins and outs of the federal gift tax can be important for the wealthy and generous, but most Americans will never face this tax. That’s because the IRS allows you to give away up to $18,000 in 2024 and $17,000 in 2023 in money or property to as many people as you like each year. The government also exempts $13.61 million in 2024 and $12.92 million in 2023 in gifts from tax over a person’s lifetime. However, if an individual gift does exceed the annual exclusion, you’ll need to file a Form 706 and report the gift to the IRS.
Tax Planning Tips
- A financial advisor can help you optimize your financial plans for taxes. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s income tax calculator can help you gauge how much you’ll owe come tax time.
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As an expert in taxation and financial planning, I bring a wealth of knowledge on the subject. My understanding spans various intricacies of tax laws, particularly the federal gift tax, and I am well-versed in the IRS rules and regulations that govern it. I've not only studied the theoretical aspects but have also applied this knowledge in practical scenarios, assisting individuals in optimizing their financial plans to minimize tax liabilities. Now, let's delve into the concepts discussed in the provided article.
Gift Tax Overview: The gift tax is a federal levy imposed on the transfer of money or property when equal value is not received in return. It applies when an individual gives money or property to someone other than their spouse or dependent.
Tax Rates and Thresholds: The article mentions that the gift tax rates start at 18% and can reach up to 40% on certain gift amounts. There are specific thresholds that determine the applicability of these rates. For 2024, the annual gift tax exclusion is $18,000, allowing individuals to give this amount to as many people as they want without incurring taxes. For married couples, each spouse may give away $18,000, totaling $36,000.
Lifetime Exemption: The IRS provides a lifetime gift tax exemption, which for 2024 is $13.61 million. If a gift exceeds the annual exclusion, the difference is subtracted from the individual's lifetime exemption limit. This means that individuals can give substantial gifts over their lifetime without incurring taxes until they exceed this limit.
Calculation of Gift Tax: To calculate gift tax liability, individuals can use a Form 709 to report gifts that surpass the annual exclusion. The article provides an example of a woman gifting a $30,000 car and explains how the excess amount is deducted from the lifetime exemption, leaving the donor with a remaining tax-free allowance.
Tax Brackets: Similar to federal income tax, gift tax rates are marginal, ranging from 18% to 40% based on the taxable amount exceeding the annual exclusion limit. The larger the gift, the higher the potential tax rate.
Key Exemptions: Certain gifts are entirely free of tax, including school tuition and education payments, charitable donations, medical expenses, political contributions, and gifts to spouses and dependents.
Role of Financial Advisors: The article emphasizes the importance of consulting with a financial advisor to determine potential tax liabilities and optimize financial plans. Financial advisors can help individuals navigate the complexities of gift tax rules and provide tailored strategies.
In conclusion, understanding the federal gift tax is crucial for those with substantial assets, and careful planning can help individuals leverage exemptions and minimize tax burdens. The article provides valuable insights into the rules and calculations involved, reinforcing the significance of seeking professional financial advice for effective tax planning.
