Gift tax is a commonly misunderstood tax. Many people feel that if they receive money as a gift, they will need to pay the IRS part of that gift in the form of gift tax. This is actually not usually the case. Not only does the gift receiver not have to pay gift tax, more often than not, the gift giver also does not have to pay tax. In this blog, we will explain gift tax, who has to pay it and when they have to pay it.
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What is a gift tax and who is taxed?
Gift tax is exactly what it sounds like, it is a tax placed on a gift given to somebody. If someone owes gift tax, it is usually the gift giver. Unless there was an expectation set in place prior to the gift being given, the donor of the gift is responsible for the gift tax if any is due.
What is the gift tax limit for 2024?
The gift tax exemption for 2024 is $18,000 per gift recipient. This is an increase of $1,000 from 2023.
How does the gift tax work?
For 2024, the gift tax exclusion is $18,000 per gift recipient. What this does not mean is that any dollar above that $18,000 gift is taxable. What does mean, is that any dollar over $18,000 gifted to an individual by an individual must be disclosed on a gift tax form.
This gift tax form is simply a method of tracking for the IRS. The reason that this is tracked is that there is a lifetime gift exclusion per person, and once that person has given over this exclusion, they must then pay gift taxes on any gifts given above the annual exclusion. The good news here is that this lifetime exclusion is over $13.61 million in 2024. This exclusion drops back to pre-2018 levels in 2026; however, the limit is still over $6 million dollars.
The vast majority of people will never give over $13.61 million in their lifetime (or even $5 million once the higher exclusion sunsets in 2026). So if you are wondering if a gift from your parents, grandparents, aunts, uncles or friends might be taxable, it likely won’t be unless they have been gifted over the lifetime exclusion.
Even if they have given over the lifetime exclusion, the gift tax is their responsibility as the donor, not yours as the gift receiver.
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What is the gift tax lifetime exclusion for 2024?
The lifetime exclusion is $13.61 million in 2024.
What is the gift tax rate for 2024?
If you are lucky enough, and generous enough to use up your lifetime exclusion, gift taxes range from 18 to 40%.
Gift Tax 2023 and 2024
| 2024 | 2023 | |
| Gift Tax Exemption | $18,000 per gift recipient | $17,000 per gift recipient |
| Gift Tax Lifetime Exclusion | $13.61 million | $12.92 million |
Do you pay taxes when you receive a gift?
As discussed above, the gift receiver is not responsible for gift tax when they receive a gift. The gift receiver also does not need to fill out a gift tax return. The donor of the gift is responsible for ensuring that this gift is reported to the IRS on their own tax return.
How does the gift tax lifetime exclusion work?
Each time you give a gift that is over the annual gift exclusion amount ($18,000 per gift receiver for 2024), you must file a gift tax return with your normal tax return. This gift tax return adds up over time, and once you hit the lifetime maximum exclusion amount ($13.61 million in 2024 – this amount typically increases with inflation), you will then be hit with gift tax when you give over the annual exclusion amount.
This $13.61 million exclusion also is your estate tax exclusion. So if you give $13.61 million over your lifetime, and you leave an estate behind, that estate will likely be taxed at the estate tax rate.
Reminder, this $12.92 million drops back to pre-2018 levels in 2026, which was around $5 million.
How much can you gift a family member tax-free?
You cangift each individual $18,000 in 2024 without filing a gift tax return. If you gift more than that amount, you have to file a gift tax return. However, you will not have to pay gift tax until you have gifted an aggregate amount over the lifetime exclusion.
If you are gifting for medical expenses or education expenses, as long as you pay directly to the entity, i.e. the university or hospital, those funds do not count against your annual or lifetime tax gift tax exclusion.
How does the IRS know if I give a gift?
The IRS finds out if you gave a gift when you file a form 709 as is required if you gift over the annual exclusion. If you fail to file this form, the IRS can find out via an audit. If they do not find out during your lifetime, they could find out during an audit of your estate, and then hit your estate with penalties and interest that accrued from when the gift tax return should have been filed.
The IRS can also use public records, such as title transfers, to track gifts that were not reported. Some states will aggressively track gifts and report to the IRS as well.
Who is responsible for filing a gift tax return?
The gift giver is responsible for filing a gift tax return if they gift more than the annual exclusion.
What happens if I don’t file a gift tax return?
If you fail to file a gift tax return, you’ll be assessed a gift tax penalty of 5 percent per month of the tax due, up to a limit of 25 percent. If your filing is more than 60 days late (including an extension), you’ll face a minimum additional tax of at least $205 or 100 percent of the tax due, whichever is less.
Failure to pay the gift tax on time will result in a penalty of 0.5 percent per month of the amount due, up to a total of 25 percent. If you ignore an IRS notice to pay gift tax, your monthly penalty will increase from 0.5 percent to 1 percent. Filing an extension does not allow you to pay gift tax late; you must still pay the tax by the tax deadline, even if you have not filed yet.
How do I avoid gift tax?
If you think you will give more than $13.61 million in your life as gifts, it would be beneficial to use up the annual gift tax exclusion each year. This exclusion is per person, so you can give $18,000 in 2024 to as many people as you want per year and not pay any gift tax on that money. This can also be doubled if you are married and you can do a split gift. So a married couple can give $36,000 in 2024 without having to file a gift tax return and this does not count against the $13.61 million lifetime exclusion.
What is the gift tax on $50,000?
Unless you have gifted over $13.51 million in your lifetime, there is no gift tax on $50,000. The $50,000 needs to be disclosed to the IRS for every dollar over the $18,000 annual exclusion, and will simply count against your $12 million lifetime exclusion.
Can each parent gift $18,000 to a child in 2024?
Yes! In 2024, each parent can gift up to $18,000 to a child without triggering the gift tax.
How much can you inherit from your parents without paying taxes?
In general, the receiver of an inheritance does not have to pay gift tax or inheritance tax. If the parents are alive when they gift the money, it is their responsibility to file a gift tax and pay any tax due. If they are deceased when the estate pays the inheritance to the heirs, it is the estate’s responsibility to pay the tax due.
Is it better to gift or inherit money?
Whether you should gift or inherit money depends on your financial goals and personal situation.
Gifting money can be a great way to help family members or friends, and it can be a way to reduce your taxable estate. If you are gifting money, you can take advantage of the annual gift tax exclusion without triggering the gift tax.
Inheriting money can also have its benefits. When you inherit assets, you typically receive a stepped-up basis, which means that the value of the assets is adjusted to their current market value at the time of inheritance. This can be beneficial if the assets have appreciated significantly since they were purchased, as you won’t owe as much in capital gains taxes if you decide to sell them.
Lifetime gift tax limit change in 2026
The lifetime gift tax exclusion will be cut in half in 2026. The estimates put the 2026 lifetime limit at around $6.8 million. However, the IRS will allow the use of either the lifetime gift tax exclusion that is applied when gifts are made or the exclusion amount applicable when the donor dies. It will be whichever is greater. Therefore if you made large gifts before 2026 then you don’t need to worry.
Be informed about gift taxes in 2024
The majority of people probably aren’t affected by the gift tax and don’t need to disclose smaller gifts to the IRS. However, it’s important to know what the limits are and how it works so that you are aware in case you do give a large amount of money in the future. If you want help with your finances and are interested in having a comprehensive financial plan, feel free to
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.
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District Capital is an independent, fee-only financial planning firm. We help professionals and entrepreneurs in their 30s and 40s elevate their finances and maximize their money. We are based in Washington, D.C and we work with people virtually nationwide.
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As a financial expert with a deep understanding of tax-related topics, including gift tax, I aim to provide comprehensive insights into the intricacies of the gift tax system. My expertise is grounded in a thorough understanding of the tax code, financial planning strategies, and the nuances of gifting and inheritance.
Let's delve into the key concepts discussed in the article "Money 101" by Alvin Carlos, published on November 30, 2023:
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What is a gift tax and who is taxed?
- Gift tax is a tax imposed on the transfer of property or money from one individual to another without expecting something of equal value in return. The responsibility to pay gift tax typically falls on the gift giver unless there was a prior agreement with the recipient.
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What is the gift tax limit for 2024?
- The gift tax exemption for 2024 is $18,000 per gift recipient, representing a $1,000 increase from the previous year.
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How does the gift tax work?
- The gift tax exclusion for 2024 is $18,000 per gift recipient. Amounts exceeding this limit must be reported on a gift tax form. The lifetime gift exclusion, which is $13.61 million in 2024, comes into play when an individual exceeds the annual exclusion consistently over time.
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What is the gift tax lifetime exclusion for 2024?
- The lifetime exclusion for gift tax in 2024 is $13.61 million.
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What is the gift tax rate for 2024?
- Gift tax rates range from 18% to 40% for amounts exceeding the lifetime exclusion.
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Do you pay taxes when you receive a gift?
- Gift recipients are not responsible for paying gift tax on the received amount. The duty to report the gift to the IRS lies with the gift giver.
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How does the gift tax lifetime exclusion work?
- Each gift exceeding the annual exclusion amount contributes to the cumulative total. Once the lifetime exclusion is surpassed, gift tax becomes applicable.
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How much can you gift a family member tax-free?
- In 2024, an individual can gift up to $18,000 to each family member without filing a gift tax return.
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How does the IRS know if I give a gift?
- The IRS is informed of gifts through the filing of Form 709, which is required for gifts exceeding the annual exclusion. Audits, public records, and state reporting may also contribute to the IRS's knowledge of gifts.
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Who is responsible for filing a gift tax return?
- The gift giver is responsible for filing a gift tax return if the gift exceeds the annual exclusion.
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What happens if I don't file a gift tax return?
- Failure to file a gift tax return can result in penalties, including a 5% per month penalty on the tax due, up to 25%.
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How do I avoid gift tax?
- Utilizing the annual gift tax exclusion and being mindful of the lifetime exclusion can help individuals avoid gift tax. Married couples can leverage a combined exclusion for larger gifts.
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What is the gift tax on $50,000?
- Unless an individual has gifted over $13.51 million in their lifetime, there is no gift tax on $50,000. Amounts above the annual exclusion need to be reported but will count against the lifetime exclusion.
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Can each parent gift $18,000 to a child in 2024?
- Yes, in 2024, each parent can individually gift up to $18,000 to a child without triggering the gift tax.
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How much can you inherit from your parents without paying taxes?
- Generally, the receiver of an inheritance does not pay gift or inheritance tax. If the parents are alive when gifting, they handle the gift tax. If deceased, the estate assumes the responsibility.
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Is it better to gift or inherit money?
- The choice between gifting and inheriting money depends on individual financial goals. Gifting can help reduce taxable estates, while inheriting may provide a stepped-up basis for assets.
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Lifetime gift tax limit change in 2026
- The lifetime gift tax exclusion is expected to be halved in 2026, with estimates around $6.8 million. The IRS allows the use of the greater of the lifetime gift tax exclusion at the time of gifting or the exclusion applicable at the donor's death.
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Be informed about gift taxes in 2024
- While many individuals may not be directly affected by gift tax, understanding the limits and mechanisms is crucial for those making substantial gifts. Being informed ensures compliance with tax regulations.
Alvin Carlos, the author, is a Certified Financial Planner (CFP®) and Chartered Financial Analyst (CFA) with expertise in investment advising and financial planning. His insights aim to empower individuals, particularly professionals in their 30s and 40s, to achieve their financial goals.
