Gift Tax

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21 Aug, 2024

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A gift tax is a tax paid by individuals who transfer anything of high value to another person without getting something of the same value in return. This tax aims to stop wealthy families from evading estate taxes by transferring assets to their children during their lifetime.

Gifts can be anything of substantial value, for example, real estate, large sums of money, or stocks. The federal government levies this tax even if the person donating did not intend it to be a gift. Individuals receiving a gift need not worry about paying taxes, as the giver must pay this tax, not the receiver.

What is Gift Tax?

Gift tax meaning refers to a tax payable on high-value assets transferred by an individual to another individual without receiving anything or something of less value in return.
The government started imposing this tax to prevent persons from avoiding tax payments by transferring their property to other persons. The federal tax agency changes the tax rates every year owing to inflation.
A key difference between gift and inheritance taxes is that the federal government does not levy the latter.
Gifts to a spouse and charitable gifts are not subject to this tax.

Gift Tax Explained

The gift tax definition refers to a federal tax levied on an individual who transfers substantial money or a high-value property while receiving nothing (or something worth less than the same value) in exchange. The Internal Revenue Service or IRS fixes the limits on how much a person can gift before filing a tax return and paying taxes.

The government started imposing this tax to prevent individuals from avoiding tax payments by transferring money and items of value to others. It obliges the recipients and donors to honor their tax liability. All donors must fill out the gift tax return or Form 709 and submit it with their annual tax returns within April 15 of the year succeeding the year of donation.

The gift tax percentage ranges from 18% to 40% and depends on the taxable gift’s size. One must note that this tax is payable only on annual gifts worth more than a particular amount. Anything below that limit is not subject to tax.

Let us look at some things considered gifts and subject to this tax.

A loan of above $10,000 at an interest rate lower than the market rate
Paying an amount owed by another person
A check
Canceling indebtedness
A gift made by an individual to a corporation

The government changes the gift tax percentages to keep up with inflation. The rates for the tax year 2022 are as follows:

Taxable amount exceeding ($)	Taxable amount not exceeding ($)	Excess tax rate (%)
N/A	10,000	18
10,000	20,000	20
20,000	40,000	22
40,000	60,000	24
60,000	80,000	26
80,000	100,000	28
100,000	150,000	30
150,000	250,000	32
250,000	500,000	34
500,000	750,000	37
750,000	1 million	39
1 million	N/A	40

Example

Suppose John gives $20,000 to each of his four adult children annually. Since he has already exhausted his lifetime exclusion, any amount over that threshold is taxable.

The taxable portion of John’s gifts is $4,000 per child or $16,000 (in total). Considering the gift tax percentages of 2022. the first $10,000 given as a gift to the children is subject to 18% tax, for a total of $1,800. The next $6,000 will attract at 20%, amounting to $1,200. Therefore, the total tax amount paid by John will be $3,000.

Limit

In most cases, individuals do not have to file a gift tax return and pay the tax owing to the annual exclusion and the lifetime exemption. Let us look at these concepts in detail.

#1 - Annual Exclusion

The annual exclusions for tax years 2022 and 2023 are $16,000 and $17,000, respectively. If individuals give a gift, they do not have to file a return for the same until the amount or property transferred to another individual is worth at least the annual exclusion amount. For instance, if David gifts someone $22,000 in 2022, he must file a gift tax return of $6,000.

One must remember that this annual exclusion is applicable per person. This means that individuals can gift significantly more than that limit if they transfer money or properties to multiple organizations or individuals. Also, married couples can gift an individual an amount up to double the yearly exclusion limit before filing a tax return for the gift. This is because each spouse can gift up the annual exclusion limit.

#2 - Lifetime Exemption

Filing a gift tax return does not mean an individual must pay taxes, as the federal tax agency offers a lifetime exemption for the overall amount persons may gift throughout their lifetime. The lifetime exemption amount for tax years 2022 and 2023 are $12.06 million and $12.92 million, respectively.

For instance, suppose Jim gifted an individual $21,000 in 2022. He must file a tax return for $5,000, which is the amount exceeding the annual exclusion. This amount will count towards Jim’s lifetime exemption. Hence, if he has not exhausted it yet, he need not pay taxes on that particular amount at that point.

Exemptions

The following are not subject to this tax:

#1 - Gifts For Educational Purposes

Individuals must pay an educational institution for tuition directly to avail of the unlimited exclusion for qualified education expenses. However, one must remember that living costs and expenses related to books and supplies are not subject to an exemption.

#2 - Gifts To A Spouse

The IRS does not consider a gift to a spouse who is a U.S. citizen a taxable gift. On the other hand, gifts to a foreign spouse are subject to a yearly limit of $164,000 for the tax year 2022.

#3 - Present-Interest Gifts

Present interest means an individual receiving the gift has an unrestricted right to enjoy it instantly. In addition, in 2022, individuals can give gifts worth a maximum of $16,000 to multiple persons without paying tax. Besides these, charitable gifts are not subject to this tax.

Gift Tax vs Inheritance Tax vs Estate Tax

The application of gift, inheritance, and estate taxes can be confusing for taxpayers. If one does not understand the concepts, they might fail to file their tax returns accurately. Hence, individuals must know how they differ from each other. To understand the distinct characteristics, one can refer to the table below.

Gift Tax	Inheritance Tax	Estate Tax
This tax is payable on transfers made to another person during a donor’s lifetime.	The IRS imposes an estate tax on the heirs of the deceased individual who inherit the assets.	An estate tax is payable on transferring a decedent’s property at death.
The federal government levies this tax. Among the states in the U.S., only Connecticut imposes this tax.	The federal government does not have an inheritance tax. That said, residents of certain states may have to pay this tax.	The federal government imposes an estate tax. However, most states in the U.S. do not collect this tax.

Frequently Asked Questions (FAQs)

1. Are gift tax deductible?

Making a gift to someone does not ordinarily impact an individual’s federal income tax liability as they cannot claim a deduction against the value of the gifts. However, if the gift is a deductible charitable contribution, one can reduce their taxable income by itemizing deductions.

2. Can gift tax returns be e-filed?

No, it is not possible for individuals to e-file Form 709. Instead, per the instructions of the IRS, one must fill out the form and mail it to a particular address.

3. Can gift tax returns be filed late?

The due date for filing a tax return is April 15, after the year in which a person gave a gift. That said, one can request to extend the time to file their tax return if they cannot do so within the deadline. Usually, individuals have to pay an additional fee if they file Form 709 after the due date.

4. Does gift tax apply to family?

This tax applies to both family and non-family members. Thus, if individuals give a gift worth more than the annual exclusion and lifetime exemption to a person they are not related to, they must still pay the tax.