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.
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 exemption for 2022?
The gift tax exemption for 2022 is $16,000 per gift recipient.
What is the gift tax exemption for 2023?
The gift tax exemption for 2023 is $17,000 per gift recipient. This is an increase of $1,000 from 2022.
How does the gift tax work?
For 2022, the gift tax exclusion is $16,000 per gift recipient (increasing to $17,000 in 2023). What this does not mean is that any dollar above that $16,000 gift is taxable. What does mean, is that any dollar over $16,000 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 $12 million in 2022. 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 $12 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.
What is the gift tax lifetime exclusion for 2022 and 2023?
The lifetime exclusion is $12.06 million in 2022 and $12.92 million in 2023.
What is the gift tax rate for 2022 and 2023?
If you are lucky enough, and generous enough to use up your lifetime exclusion, gift taxes range from 18 to 40%.
Gift Tax 2022 and 2023
|Gift Tax Exemption||$16,000 per gift recipient||$17,000 per gift recipient|
|Gift Tax Lifetime Exclusion||$12.06 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 ($16,000 per gift receiver for 2022 and $17,000 in 2023), you must file a gift tax return with your normal tax return. This gift tax return adds up overtime, and once you hit the lifetime maximum exclusion amount ($12.06 million in 2022 and $12.92 million in 2023 – this amount typically increases with inflation), you will then be hit with gift tax when you give over the annual exclusion amount.
This $12.06 million exclusion also is your estate tax exclusion. So if you give $12.06 million over your lifetime, and you leave an estate behind, that estate will likely be taxed at the estate tax rate.
Reminder, this $12.06 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 can gift each individual $16,000 in 2022 or $17,000 in 2023 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 $12 million in your lifetime 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 $16,000 in 2022 or $17,000 in 2023 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 $32,000 in 2022 without having to file a gift tax return and this does not count against the $12 million lifetime exclusion.
What is the gift tax on $50,000?
Unless you have gifted over $12 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 $16,000 annual exclusion, and will simply count against your $12 million lifetime exclusion.
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.
Gifting in 2022 and 2023
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 schedule a discovery call with one of our financial advisors today!
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.