Plan on giving cash or property to family or friends? Keeping it below the annual gift tax exemption can help you save both time and money.
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Thanks to the gift tax exclusion (a.k.a., the gift tax limit or gift tax exemption), you can give money or property each year to family members, friends, and others without having to pay any federal gift tax or even file a gift tax return. The federal gift tax rates range from 18% to 40%, so avoiding the tax can save you a lot of money. And not having to bother with a gift tax return can save you a lot of time. So, if you're feeling generous, make sure you're aware of the gift tax exclusion limit for 2023.
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What's the Federal Gift Tax?
Generally, the federal gift tax applies to all gifts of property by an individual during the year. The tax is typically paid by the person who gives the gift, not by the person who receives it. However, if the giver doesn't pay the tax, the recipient may have to pay it. In addition, if the person giving the gift dies before the tax is paid, the estate is responsible for paying the tax.
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It doesn't matter if the gift is made directly or indirectly. And the gift tax doesn't just apply to cash gifts, either. It applies whether the property given is real, personal, tangible, or intangible. So, for example, deeding a plot of land, giving a car, forgiving a debt, assigning the benefits of an insurance policy, or transferring stock could all trigger a federal gift tax bill. And if you're giving something other than cash, the amount of the gift for gift tax purposes is the property's "fair market value" on the date of the gift.
Observation: Generally, a gift is deemed "given" for gift tax purposes if you transfer property to someone else, and you don't expect something of at least equal value in return.
Fortunately, there are a number of gift tax exemptions that can be used to avoid paying the tax. The most well-known exemption is the annual gift tax exclusion. This is a set dollar amount that you can give each year that isn't subject to the tax (the amount is adjusted for inflation each year). And you can give up to that amount to as many people during the year as you want. If you're married, your spouse can also give up to the same amount – even to the same people that receive a gift from you.
There are other gift tax exemptions that may apply, too. For example, the gift tax generally doesn't apply to gifts to:
- Your spouse;
- Charitable or religious organizations;
- Political organizations;
- Educational organizations as tuition for someone else; and
- Doctors or other health care providers as payment for the medical care of someone else.
It's important to note, however, that there may be special requirements or other exceptions to these exemptions, or other exemptions that may apply in certain situations. So, it's best to check with a tax professional before making any sizeable gift to see if an exemption applies.
How Much is the Gift Tax Limit for 2023?
The gift tax exclusion for 2023 is $17,000 (it was $16,000 in 2022). As a result, you can give up to $17,000 to as many people you want in 2023 without having to worry about paying the federal gift tax. And, again, if you're married, your spouse can also give $17,000 to the same people. Between you and your spouse, that's a total of $34,000 per person in 2023. In addition, if you stay under the gift tax limit for each gift recipient, you don't have to file a gift tax return for the year.
So, for example, if you're married and have two married children and four grandchildren, you and your spouse can give up to $34,000 in 2023 to each of your kids, their spouses, and all the grandchildren without even having to file a gift tax return or pay any tax. That's $272,000 in tax-free gifts! Just remember that the $17,000 (or $34,000) limit is an annual limit, so you have to make your gifts before December 31, 2023 (gift checks must also be deposited by that date).
Tax Tip: If a married couple gives away community property, the gift is treated as if half of the property is given by each spouse, which could have implications for determining whether the $17,000 gift tax limit is exceeded. For example, a $20,000 gift of community property counts as two separate $10,000 gifts made by each spouse. Spouses can also agree to "split" a gift that isn't community property if certain requirements are met.
What If You Exceed the Annual Gift Tax Limit?
If you give more than $17,000 to anyone in 2023, and no exemption applies, then you'll have to file a federal gift tax return (IRS Form 709). However, that doesn't necessarily mean you'll owe any tax. There's also a lifetime gift tax exclusion that can shield your gifts from tax – and it's a rather high limit, so most people never end up having to pay any gift tax at all.
For 2023, the lifetime gift tax limit is $12.92 million (I told you it was high!). That's up from $12.06 million for 2022 (the figure is adjusted annually for inflation). Plus, if you're married, the lifetime limit is double just like the annual limit. (The lifetime gift tax exemption is the same as the annual estate tax exemption.)
So, each year that you exceed the annual gift tax exclusion for any recipient, the excess amount is reported on Form 709 for that year. However, you don't have to pay gift tax unless and until the total amount reported on all your 709 forms over the course of your life exceeds the lifetime gift tax limit for that year. As a result, only wealthier Americans who are giving large sums of money or property away get ever get hit with a gift tax bill. Most people don't have to worry it.
Increased Lifetime Gift Tax Limit in 2026
The lifetime gift tax exclusion is scheduled be cut in half in 2026. Estimates put the 2026 lifetime limit at around $6.8 million. Congress could permanently adopt the current amount, but at this point there's no reason to believe that will happen.
Fortunately, though, IRS regulations will allow use of either the lifetime gift tax exclusion that applied when gifts are made or the exclusion amount applicable when the donor dies, whichever is greater. As a result, people who make large gifts before 2026 don't have to worry about losing the benefits of the higher gift tax exclusion amount after it's lowered.
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