Gift-giving is a cherished tradition, but when the value of your gift exceeds certain thresholds, the IRS may impose a gift tax. If you’re planning to transfer assets or money to a loved one, understanding the gift tax rules can save you from unexpected tax liabilities. Below, we’ll dive into some of the most common questions and answers about the gift tax, along with key points to keep in mind.
What is the Gift Tax?
The gift tax is a federal tax imposed on the transfer of money, property, or other assets to another person where full market value is not received in return. It ensures that individuals can’t avoid estate taxes by gifting their assets during their lifetime.
Who Pays the Gift Tax?
Generally, the donor (the person giving the gift) is responsible for paying the gift tax. However, in special situations, the recipient (donee) may agree to pay it instead. If you’re considering this type of arrangement, it’s highly recommended that you consult with a tax professional.
What is Considered a Gift?
Any transfer where you don’t receive something of equal value in return is considered a gift. This can include:
- Cash
- Real estate
- Stocks or bonds
- Forgiving a debt
- Interest-free loans
What Gifts Are Excluded from Tax?
Although most transfers are considered taxable gifts, there are several important exclusions:
- Annual Exclusion Gifts: In 2024, you can give up to $18,000 per recipient without triggering the gift tax.
- Tuition or Medical Payments: If you pay someone’s tuition or medical bills directly to the institution, this is excluded from gift tax.
- Gifts to Your Spouse: Gifts between spouses are generally exempt from gift tax.
- Gifts to Charities: Contributions to qualified charities can be deducted and are exempt from the gift tax.
- Gifts to Political Organizations: These gifts are also excluded from taxation.
Can I Deduct Gifts on My Income Tax Return?
Gifts you make are not deductible on your federal income tax return, unless they are charitable contributions to qualifying organizations. Giving money or property to your heirs or other individuals does not qualify for a deduction.
What is the Annual Exclusion for Gifts?
For 2024, the annual exclusion allows you to give up to $18,000 per recipient without triggering the gift tax. This means you can give multiple people up to $18,000 each without having to file a gift tax return. If you are married, you and your spouse can combine your exclusions, allowing you to gift up to $36,000 per recipient in 2024.
What About Gift Splitting with My Spouse?
If you and your spouse jointly own property or want to give a gift together, each of you is entitled to the annual exclusion amount. In 2024, you and your spouse could gift up to $36,000 to a single recipient without any tax consequences.
Lifetime Gift Tax Exemption
The lifetime exemption is the total amount you can give away over your lifetime without paying gift tax. For 2024, the lifetime exemption is $12.92 million. If you exceed the annual exclusion in any given year, the excess will count toward your lifetime exemption. Once you reach the limit, any additional gifts will be taxed at the applicable gift tax rate.
What Happens if I Sell Gifted Property?
When you sell property that has been gifted to you, the basis in the property is generally the same as the donor’s original basis. For example, if you receive stock that the donor originally purchased at $10 per share and later sell it for $100 per share, you would pay income tax on the $90 gain per share. The rules are different for property acquired from an estate, so be sure to consult with a tax expert if you have specific questions.
What is “Fair Market Value”?
For gift tax purposes, the Fair Market Value (FMV) of a gift is the price at which the property would be sold between a willing buyer and a willing seller, neither being under any pressure to complete the transaction, and both having reasonable knowledge of the facts. This value is crucial for determining the taxable value of gifts, especially for real estate or high-value items like artwork.
How Do I File a Gift Tax Return?
If your gifts exceed the annual exclusion or fall outside the exemption categories, you must file Form 709 (U.S. Gift Tax Return). Here’s what you may need to include:
- Copies of appraisals for property
- Relevant documents related to the transfer
- Documentation for any unusual items (e.g., partial gifts)
If you need to amend an already filed return, simply file another Form 709 with “Supplemental Information” written across the top and include a statement of the changes made, along with supporting documentation.
Consult a Tax Professional
Understanding the nuances of gift tax can help you make better financial decisions and avoid potential penalties. If you are planning to give substantial gifts or are unsure whether your gift may be taxable, it’s always a good idea to consult with a tax professional.
Gift giving should be a joyful process, and with the right planning, you can share your wealth with loved ones or favorite causes without worrying about tax complications.
