The Gift Tax Made Simple (2024)

Key Takeaways

• Givers, not receivers, pay the federal gift tax, but you can give away up to $12.92 million in cash or other assets during your lifetime (tax year 2023) without triggering the gift tax.

• If you’re married, your spouse is entitled to give another $12.92 million (tax year 2023) in lifetime gifts without incurring a gift tax.

• You can give up to $17,000 (tax year 2023) per person per year to as many people as you like without those gifts counting against your $12.92 million lifetime gift tax exemption.

• Gifts to IRS-approved charities, to your spouse (assuming they are a US citizen), to pay another person’s medical expenses, and to cover another person’s tuition expenses are all exempt from the gift tax and from the annual limit.

How much can you give tax free?

The annual gift tax exclusion provides additional shelter.

The annual federal gift tax exclusion allows you to give away up to $17,000 each in 2023 to as many people as you wish without those gifts counting against your $12.92 million lifetime exemption. (After 2023, the $17,000 exclusion may be increased for inflation.)

Say you give two favored relatives $21,000 each in 2023 and give another relative $10,000. The $21,000 gifts are called taxable gifts because they exceed the $17,000 annual exclusion. But you won’t actually owe any gift tax unless you’ve exhausted your lifetime exemption amount.

• Assuming you haven’t, the two taxable gifts simply reduce your lifetime exemption by $4,000 for each gift or $8,000 total for the two gifts.
  • ($21,000 - $17,000) x 2 = $8,000.
• The other gift of $10,000 is ignored because it’s below the $17,000 annual exclusion for 2023.

If you give three individuals $17,000 each in 2023, these gifts are ignored because no single gift exceeds the annual exclusion.

How does gift tax relate to estate tax?

You have a $12.92 million federal estate tax exemption for 2023. You can leave up to that amount to relatives or friends free of any federal estate tax. If you’re married, your spouse is entitled to a separate $12.92 million exemption.

Gifts made during your lifetime can reduce your taxable estate by moving assets out of your ownership and therefore out of your estate. However, gifts in excess of the annual exclusion also reduce your estate tax exemption.

• In the earlier examples, the two $21,000 taxable gifts made in 2023 would reduce your estate tax exemption by $8,000 to $12,912,000 ($12,920,000- $8,000).
• The separate $10,000 gift in 2023 and the three $17,000 gifts in 2023 wouldn't reduce your estate tax exemption.

Bottom line: Making annual gifts up to the annual exclusion is a good way to reduce your taxable estate without any negative side effects.

TurboTax Tip: You and your spouse (if you’re married) can each contribute up to $17,000 per year to a 529 college savings plan for a future student without decreasing your lifetime gift tax exemption. You can even make a lump-sum contribution in a single year and treat it as though it was made over five years for gift tax purposes, thanks to a special IRS rule.

Are 529 contributions subject to gift tax?

Contributions to a 529 college savings plan are gifts to the future student. However, a special rule allows you to make a lump-sum contribution in a single year and treat it as though it was made over five years for gift tax purposes.

For example, you can contribute $85,000 (5 years x $17,000) in 2023 to jump-start a 529 college savings account for your child. If you’re married, your spouse can do the same.

• You can spread the gift over 2023-2026 without incurring any gift tax and without reducing your $12.92 million lifetime gift tax exemption or your $12.92 million estate tax exemption.
• Your spouse can spread their $85,000 gift over five years as well.

The only caveat: You can’t make any additional gifts to the same recipient during those years without using part of your $12.92 million exemption.

Do you need to file a gift tax return?

If you make a taxable gift (one in excess of the annual exclusion), you are required to file Form 709: US Gift (and Generation-Skipping Transfer) Tax Return.

• The return is required even if you don’t actually owe any gift tax due to the $12.92 million lifetime exemption.
• The return is due by the tax filing deadline, typically April 15, 2024, of the year after you make the gift—the same deadline as Form 1040.
• If you extend your Form 1040 tax return filing to October 15, the extended due date also applies to your gift tax return.

If you’re married, you can’t file a joint gift tax return. Each spouse needs to file a separate return if they make any taxable gifts. You can, however, choose to “split” gifts with your spouse. Making a split gift allows you to take advantage of your annual gift tax exclusion plus your spouse’s exclusion for a gift that is made entirely by you.

For example, say you gave $34,000 to your child in 2023. By treating it as a split gift, you can completely shelter the gift with your $17,000 exclusion plus your spouse’s $17,000 exclusion.

• That way, no gift tax is due.
• The gift doesn't reduce the $12.92 million lifetime gift tax exemption in effect for 2023 or the estate tax exemption for you or your spouse.

If you choose to make a split gift, you need to file Form 709, and your spouse must consent to the arrangement.

A bigger story

This article only covers the basics of federal gift taxes. For more information, see IRS Publication 950: Introduction to Estate and Gift Taxes. Also see the instructions for Form 709.