What is the gift tax?

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).

Who pays the gift tax?

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).

When is a gift taxable?

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:

  1. Gifts that are not more than the annual exclusion for the calendar year.
  2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  3. Gifts to your spouse.
  4. Gifts to a political organization for its use.

In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.

What is the 2022 gift tax exclusion, and who qualifies?

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.

What is the gift tax rate for 2022?

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.

Do you have to pay taxes if you receive money as a gift?

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.

How much can you gift a family member tax-free?

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 bottom line

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.

Would you like some help?

If you are a client and would like to book a consultation, call us at +1 (212) 382-3939 or contact us here to set up a time.

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