The annual gift tax exemption for 2021 was set at $15,000 per recipient. This means you can give up to $15,000 to as many people as you want without paying a gift tax on any of it in the coming year. By 2022, that figure will have risen to $16,000.
If you transfer money or property to another person without receiving at least equal value in return, the IRS will charge you a gift tax. This could include parents giving money to their children, giving property such as a house or a car to their children, or any other transfer.
A lifetime exclusion of $11.7 million in 2021 and $12.06 million in 2022 is also available.
What is the gift tax?
“Any transfer to an individual, either directly or indirectly, where full consideration is not received in return,” according to the IRS. In other words, you have made a gift if you write a large check, give some investments, or give a car to someone other than your spouse or dependent.
The IRS has a gift tax limit, which applies to both the amount you can give each year and the amount you can give over your lifetime. If you exceed those limits, you will be required to pay a tax on the excess amount of gifts. The gift tax is what we’re talking about here.
Gift tax is almost always the responsibility of the donor, not the recipient. Only in exceptional circumstances will a recipient pay gift tax if he or she has agreed to pay it through an agreement with the donor.
Even if there are no immediate tax consequences for recipients, they may be subject to capital gains tax if they sell gifted property later.
What gifts are safe from tax?
Cash, checks, property, and even interest-free loans are all examples of taxable gifts. It also applies to anything you sell for less than what it is worth. If you sell your home to your non-dependent child for $175,000 when it’s worth $250,000, the $75,000 difference may be considered a gift.
This amount exceeds the annual gift tax exemption and is thus deducted from your lifetime gift tax exemption.
The definition of a gift that counts toward your gift tax limit is fairly straightforward. However, there are a few things that the IRS does not consider a gift.
You can give as many gifts as you want in these categories without having to pay a gift tax or file gift tax paperwork:
- Anything given to a citizen of the United States’ spouse
- Anything you give to someone who is reliant on you.
- Donations to charity
- Donations to political campaigns
- Direct payments to educational institutions on behalf of others
- On behalf of someone else, funds are paid directly to medical service or health insurance providers.
There are a few exceptions to keep in mind, though. You can only give your spouse $157,000 per year if he or she is not a U.S. citizen. Anything over that is subject to gift tax and is deducted from your lifetime limit.
Tuition is the only expense covered by educational funds. This excludes books, dorms, and meal plans. You can avoid the gift tax by making a lump-sum contribution to a 529 college savings plan and then spreading it out over five years for tax purposes.
The IRS allows taxpayers to contribute $75,000 to a 529 plan without paying taxes or lowering their lifetime limit of $11.7 million. The only catch is that any additional gifts you give to the same person will count against your lifetime limit.