The Gift Tax Exclusions Increased for 2023 — Here's What You Should Know
Even if you're one of the most generous gift-givers, the gift tax may not apply to any presents that you've given to friends and loved ones. The gift tax is meant to limit and/or regulate large sums of money, assets, or property transferred from one individual to another — this is mainly so that wealthy individuals can't evade estate taxes.
However, even if you don't have millions to your name, it's important to know about the gift tax, because situations like buying someone a car as a graduation present, selling your house to a family member below the full market value, or purchasing a luxury gift that exceeds a certain amount (for anyone other than your spouse) could all trigger a gift tax return.
Here, we're breaking down all you need to know about the gift tax.
What Is the Gift Tax?
The gift tax is imposed by the federal government to tax those who gift substantial assets to individuals while receiving nothing — or less than the full market value — in return. But as long as the gift-giver stays within the annual and lifetime exclusion limits, they won't have to pay the gift tax.
Gift-givers can transfer the same sum of money to multiple people without needing to file a gift tax return (also known as Form 709). For example, a grandparent can gift each of their grandchildren a check for their birthday, and as long as the amount of each check is within the annual gift tax exclusion, they will not have to pay gift tax on it — even if the total of all the birthday checks is above the annual gift tax exclusion.
Married couples can gift within the gift tax exclusion individually or in a combined amount — this is called a "split gift." You'll want to denote this amount on your gift tax return so that it's not deducted from your individual lifetime gift tax exclusion.
What Are the Gift Tax Exclusions?
There are two types of gift tax exclusions: annual and lifetime.
The annual gift tax exclusion for 2022 is $16,000 per individual. In 2023, that amount raises to $17,000 per individual. This means that the gift-giver can give another person up to that amount in one year without needing to file a gift tax return.
The lifetime gift tax exclusion for 2022 is $12.09 million. In 2023, that amount raises to $12.92 million. What this means is that if you gift more than the annual gift tax exclusion to an individual for a certain year, the amount left over from the annual limit will now be deducted from your lifetime limit. You will need to file a gift tax return to keep track of this gifting with the Internal Revenue Service (IRS), but you won't have to pay a gift tax on this since the lifetime gift tax exclusion now applies.
Who Pays the Gift Tax?
The person who is giving the gift pays the gift tax. The only exception is that gifts between spouses are generally not taxable.
What Is Considered a Gift?
Taxable gifts include cash, real estate, vehicles, stocks and bonds, and digital assets like cryptocurrency and non-fungible tokens (NFTs).
What Gifts Aren't Subject to the Gift Tax?
Gifts between spouses aren't subject to the gift tax. Also exempt are medical and educational expenses, as well as political or charitable donations.
How to Calculate the Gift Tax
It is unlikely that most people (besides the very wealthy) will ever have to pay a gift tax. However, if your individual transfers have exceeded your lifetime gift tax exception, you will have to pay the gift tax on the exceeded amount.
The gift tax rates currently range from 18-40% and are divided into brackets by amount. We suggest checking out this computation table from the IRS to determine what your gift tax rate would be.
To illustrate this with an example, if your parent is gifting you $40,000 to help with the down payment on a home, their annual gift tax exclusion covers $17,000 of that amount (in 2023). The remaining $23,000 will be deducted from their lifetime gift tax exclusion of $12.92 million. If they have already spent their lifetime gift tax exclusion, this leftover $23,000 is now subject to the gift tax, and according to the IRS computation table, this amount will be taxed at 22%.
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