As the holiday season looms, your mind may already be turning to the giving and receiving of gifts…and, of course, the tax implications thereof.
You may be especially concerned if you remember reading about the unprecedented changes to gift and estate tax laws proposed by the White House and Senate last year.
Gifts can undeniably raise questions for the tax-conscious individual, especially if you are planning on giving or receiving money or property to or from another person without exchange for the full value in return (a standard prerequisite for any good gift!).
In this post, we’ll dive deeper and clear up some of these questions before we are all overwhelmed by the full impact of the holiday season.
To learn more about what the gift tax is, how it works in 2022, who must pay the gift tax, who qualifies for exclusion, and more, continue reading below.
The gift tax is essentially exactly what it sounds like: a tax on gifts. To be more precise, it is a federal tax levied on the transfer of property by one individual to another while receiving nothing, or less than full value, in return.
The gift tax applies by transferring a gift of any type of property, including money or the use of income from property — whether or not the giver intends the transfer to be a gift. That means that if you sell something at less than its full value or make an interest-free or reduced-interest loan, you may be making a gift in the eyes of the IRS.
The IRS established the gift tax to prevent individuals from giving money or items of significant value to others without paying income taxes on the transfer. A method by which taxpayers may otherwise seek to avoid their tax liability.
That’s why there are limits on how much you can gift before filing a return and before you are taxed. If you exceed certain annual thresholds, you must report the gift, and the IRS counts it towards your lifetime gift tax exemption amount. Once you exceed this amount, the gift tax begins to apply.
There is some good news if you’re looking forward to receiving some valuable gifts: In most cases, the recipient does not have to pay federal taxes on assets received as a gift or inheritance upon receipt of those assets. However, if the assets produce income, there will likely be tax implications for that subsequent income (more on this below).
Generally speaking, the person who gives the gift (or the donor) is liable for paying the gift tax. That said, there are special circumstances under which the donor may be able to arrange to have the recipient pay the tax instead. (If you are considering this type of arrangement, reach out to us for advice.)
Overall, receiving a gift does not usually incur the gift tax. Meanwhile, the gift giver must file a gift tax return only when the gift exceeds the annual gift tax exclusion amount and may also not owe gift tax due to the basic exclusion amount (read more about this below).
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable:
In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.
For 2022, the annual gift tax exclusion is $16,000 (an increase from $15,000 in 2021). That means you could give away up to $ 16,000 worth of money or property this year without paying any gift tax.
Having said that, there is no dollar limit on the amount one person can give to another. Gift tax rules do not prohibit a donor from making gifts above the annual exclusion.
If you exceed your annual exclusion, you may not have to pay any gift tax as long as you have not previously exceeded your lifetime exclusion. However, it’s important to remember that any amount over your annual exclusion is technically taxable and therefore counts against your lifetime exclusion.
If you do give someone a taxable gift (over your annual exclusion), you are required to file a gift tax return (Form 709) for the year, and the gift reduces your lifetime gift and estate tax exclusion — in 2022, the amount of this exclusion is $12,060,000. Once you exhaust that amount for your lifetime, gift tax will begin to apply to you.
Taxable gifts are also added to your taxable estate at death. However, donors with small estates can make gifts over the annual exclusion and pay no gift or estate tax.
If you are a generous gift-giver, use up your exclusions, and find yourself liable for paying the gift tax, you can expect to pay anywhere from 18% to 40%, depending on the taxable amount over certain thresholds.
For more details, consult the Table for Computing Gift Tax in the Instructions for Form 709.
As mentioned above, you most likely will not have to pay any taxes on a gift given to you, even if that gift is in the form of a large amount of money. However, if that gift produces income for you in the future, that income will likely be subject to taxation.
For example, gifts of money or property may earn interest or dividends over time, and rental property may yield income in the form of rent. You would likely owe taxes on this income in all of these cases and more.
There is no dollar limit on the amount one person can give another. Gift tax rules do not prohibit donors from making gifts above the annual exclusion ($16,000 for 2022). However, if you give more than the annual exclusion to any one recipient other than a spouse or charity, the amount over the annual exclusion is considered a “taxable gift.”
The United States tax code is often labyrinthine and confusing, so it’s always a pleasure when things can be pretty straightforward — at least in many cases, for many people.
Of course, your circumstances are unique, and you should not interpret this article as a blanket statement. When seeking to understand your tax situation, there is no replacement for the advice of qualified experts (like us!).
However, generally speaking, the gift tax will not be a factor for anyone giving or receiving gifts with a total annual value of less than $16,000 in 2022.
So, in many cases, the gift-giving of the upcoming holiday season will not present any tax headaches! Or, at least, not any additional headaches on top of the usual amount.
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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.
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