The gift tax is a federal tax imposed on the transfer of property or assets from one person to another without receiving something of equal value in return. The person giving the gift (the donor) is usually responsible for paying the gift tax.
The gift tax applies to both direct gifts (such as cash or property) and indirect gifts (like forgiving a debt or adding someone as a joint account holder with the intention of making a gift).
What is the gift tax allowable limit?
The Internal Revenue Service (IRS) sets an annual exclusion amount, which is the maximum value of gifts you can give to another person in a single year without being subject to the gift tax.
Gift tax limit in 2023
The gift tax limit in 2023 is $17,000. This is referred to as the gift tax exclusion, and you are allowed to gift up to a value of $17,000 tax-free. Once you exceed the limit, you will have to file a federal gift tax return when you file your next tax return in 2024.
The gift tax limit changes increases by around $1,000 each year. For example, in 2021, the gift tax exclusion was $15,000 and in 2022, it was $16,000.
In addition to the annual exclusion, there is also a lifetime exemption, which is the total value of gifts you can give during your lifetime without incurring the gift tax. Similar to the gift tax exclusion, this amount is also subject to change in future years and is indexed for inflation.
- For 2021, the lifetime exemption is $11.7 million.
- For 2022, the lifetime exemption is $12.09 million.
- For 2023, the lifetime exemption is $12.92 million.
What is the gift tax rate?
The gift tax rates range from 18% to 40% depending on the value of the taxable gifts. The gift tax rates are progressive, meaning that the rate increases as the value of your taxable gifts increases.
It’s important to note that the gift tax rates are applied only to the portion of the taxable gifts that falls within each bracket, not the total value of the gifts. To determine the gift tax due, you’ll need to calculate the tax for each individual item and sum them up.
Some gifts are exempt from the gift tax, regardless of their value. These include gifts to your spouse (if they are a U.S. citizen), gifts to qualified charitable organizations, and payments made directly to educational or medical institutions for someone else’s tuition or medical expenses.
Direct vs Indirect Gifts
Direct gifts refer to the straightforward transfer of property or assets from one person to another without receiving something of equal value in return.
Indirect gifts are not as straightforward as direct gifts but still result in the transfer of value from one person to another without an equivalent exchange. Indirect gifts can be more complex and may not be immediately recognizable as gifts.
Let’s go through some examples of each type.
Examples of direct gifts
- Cash gifts: Giving money in the form of cash, check, or electronic transfer.
- Stocks or bonds: Transferring ownership of stocks, bonds, or other securities.
- Real estate: Gifting a house, land, or other real property by transferring the deed or title.
- Vehicles: Transferring the ownership of a car, motorcycle, boat, or other vehicles.
- Jewelry or art: Gifting valuable personal property, such as jewelry, artwork, or collectibles.
- Clothing and accessories: Giving new or used clothes, shoes, bags, or other accessories as gifts.
- Electronics: Gifting items like smartphones, tablets, computers, or other electronic devices.
- Furniture or appliances: Giving furniture, appliances, or other household items as gifts.
- Gift cards or certificates: Providing gift cards or certificates that can be used for purchases at specific stores or for specific services.
- Educational contributions: Making direct payments to an educational institution for someone else’s tuition or educational expenses (note that these payments may be exempt from gift tax if made directly to the institution).
- Subscriptions or memberships: Gifting subscriptions to magazines, streaming services, or memberships to clubs, gyms, or other organizations.
Examples of indirect gifts
- Loan forgiveness: If you lend someone money and later decide to forgive the debt, the forgiven amount is considered an indirect gift.
- Interest-free or below-market interest rate loans: If you lend someone money with no interest or at an interest rate below the market rate, the forgone interest could be considered an indirect gift.
- Joint bank accounts: Adding someone as a joint account holder with rights of survivorship or giving them access to your bank account, allowing them to withdraw or use funds at their discretion.
- Payment of someone else’s expenses: If you pay for someone else’s expenses without a legal obligation to do so, such as paying their rent, utilities, or credit card bills.
- Life insurance premiums: If you pay the premiums on a life insurance policy for someone else, where they are the owner and beneficiary, the premium payments may be considered an indirect gift.
- Transferring property or assets at below-market value: If you sell or transfer property or assets to someone for less than their fair market value, the difference between the market value and the amount paid can be considered an indirect gift.
- Irrevocable trust contributions: Transferring assets into an irrevocable trust for the benefit of someone else can be considered an indirect gift, as you are relinquishing control and ownership of those assets.